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Article
Indirect Network Effects and Adoption Externalities
Review of Network Economics (2008)
  • Jeffrey Church, University of Calgary
  • Neil Gandal
  • David Krause
Abstract

Can indirect network effects lead to adoption externalities? If so, when? We show that in markets where consumption benefits arise from hardware/software systems, adoption externalities will occur when there are (i) increasing returns to scale in the production of software, (ii) free entry in software, and (iii) consumers have a preference for software variety. The private benefit of the marginal hardware purchaser is less than the social benefit since the marginal hardware purchaser does not internalize the welfare improving response of the software industry, particularly the increase in software variety, on inframarginal purchasers when the market for hardware expands.

Publication Date
September 1, 2008
Citation Information
Jeffrey Church, Neil Gandal and David Krause. "Indirect Network Effects and Adoption Externalities" Review of Network Economics Vol. 7 Iss. 3 (2008)
Available at: http://works.bepress.com/david_krause/1/