Introduction to Network Economics Shi-Chung Chang Yi-Nung Yang

Outline Definition of Network Effects Types of Network Effects Origins of Network Effects Characteristics of Network Markets Conduct and Performance of Network Markets

Definition of Network Effects Some goods and services generate more value when more users consume the same goods and services. Network externalities and Network Effects Positive feedback effects Demand externalities Demand-side economies of scale Network goods and Network Markets

Types of Network Effects Direct network effects value of products increasing in the number of the users consuming the same products e.g., fax machine, telephone, online services Indirect network effects value of products increasing in the number, or the variety of, of the complementary products e.g., computer hardware-software, internet content and infrastructure

Origins of Network Effects Expectations “如果我們做同樣的夢, 那這個夢就會成真…” e.g., 56Flex vs X2, Betamax vs VHS Coordination “萬眾一心，其力斷金” e.g., V.90 Compatibility cost of combining two products to work is small Switching costs old users and new users private and social switching costs

Characteristics of Network Markets Start-up and critical mass cellular phone e.g.,二哥大 vs 大哥大 Instability Today’s success does not guarantee tomorrow’s Path dependence “不歸路?” e.g., QWERTY keyboard, MS-DOS Winner with inferior technology e.g., ISDN vs V.34 (28.8k)

Conduct and Performance of Network Markets Adoption Externalities excess inertia vs insufficient friction Inter-system and Intra-system competition inter: competition between incompatible systems Intra: competition between generations Compatibility as a strategic role incentive to compatibility Market and non-market responses property rights, committee, 水平、垂直整合 government subsidy, regulation