Optimal product strategies in the presence of network externalities

A network externality exists when a user’s benefit from a product increases with the number of other users in the same network. We examine the possibility that a software firm may exploit network externalities by introducing a limited feature version of its commercially available software into the market. The two versions need not be perfectly compatible and network externalities are allowed to decline as the difference between the versions increases. We obtain conditions under which introducing a limited feature version is optimal.     

Limits to creative destruction and technologies in practice: the case of ham radio

Drawing on the structurationist notion of ‘technologies-in-practice’, this article analyses the different types of technological actions that users perform, after technological change, in order to keep a declining technology alive over time. The research question of the article is: How do technologies-in-practice based on the application of new technology hamper the creative destruction of old technology? The case study of ham radio technology and amateur radio operators is explored. The results of the investigation support the development of a technology-in-practice ‘experimentation’ and four inductive research propositions.     

The welfare effect of quality degradation in the presence of network externalities

This paper examines how the presence of network externalities affects a monopolist's incentive for quality degradation and its welfare consequence. The software and Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Pareto-improving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm's forward and backward compatibility decisions between the original and degraded goods.     

Evolution of market shares with repeated purchases and heterogeneous network externalities

We investigate how market shares change when a new, superior technology exhibiting network externalities is introduced in a market initially dominated by an old technology. This is done under the assumption that consumers are heterogeneous in their valuation of technology quality and network externalities and that goods are not (perfectly) durable and thus have to be bought repeatedly. When both technologies are unsponsored, the old technology dominates when the quality difference is small, and it disappears when the quality difference is large. When the new technology is sponsored, the relationship between the quality difference and the long-run market share of the new technology is non-monotonic and the old technology always continues to exist.

Modeling IT relationship quality and its determinants: A potential perspective of network externalities in e-service

This article addresses the development of relationship quality in the service context of information technology (IT) based on the network externalities theory. The model predicates the IT relationship quality is influenced by both synchronization value and autarky value, whereby autarky value is influenced by the availability of complementary goods. At the same time, synchronization value is influenced by relationship commitment and perceived critical mass, while availability of complementary goods is influenced by perceived compatibility and overall installed base. Note that the autarky value represents the value generated by the product itself even if there are no other users (e.g., the printing and copying functions of a fax/printer machine), while synchronization value represents individuals’ perceived value obtained through interaction (e.g., chatting functions of Skype). The model is examined using data obtained from employees of different companies in Taiwan. The empirical findings and their implications are discussed herein.     

Optimal freeware quality in the presence of network externalities: an evolutionary game theoretical approach

New software products often face difficulty in achieving market penetration. A potential remedy is to offer a freeware version of the software to encourage initial adoption and establish a larger user base for the software, thereby increasing the commercial version's value to adopters in future periods. However, to avoid complete cannibalization of the commercial version, the freeware version's quality must be sufficiently low and the price of the commercial version must not be too high. We model the effect of these two decision variables, price and freeware quality, on the adoption of software using static and evolutionary game theory.     

On the role of network externalities in strategic delegation contracts with an industry-wide union

This article analyses the role of network externalities in managerial delegation contracts for differentiated products when the marginal product costs (the wage) are set by an industry-wide union. The results show that, in both Bertrand and Cournot equilibria, each owner offers a profit-oriented incentive scheme to his or her managers by penalizing sales maximization, irrespective of the strength of the network externalities. In the presence of weak network externalities and low product differentiation, firms can obtain higher profits in the equilibrium under Cournot-type quantity competition compared with that under Bertrand-type price competition. Furthermore, the wage chosen by the union is higher in the Cournot than in the Bertrand equilibrium. In the Cournot equilibrium, the wage increases with the strength of the network externalities. However, in the Bertrand equilibrium, there exists a threshold level of the degree of product differentiation.     

Knowledge externalities,innovation and growth in European countries: the role of institutions

This paper provides an empirical analysis of the linkages between institutions and economic growth in the European context and highlights innovation as the intermediate variable that drives this interplay. Building on the literature in the evolutionary approach to the economics of innovation and in the economic growth theory with a political economic perspective, we assume that knowledge externalities can fully take place where institutions guarantee a level playing field in the access to knowledge. We estimate the effects of a set of relevant institutional variables on the growth rate of technological knowledge and per capita GDP for a sample of European countries. The empirical analysis confirms that institutions that tend to equalise opportunities to innovate significantly amplify the impact of an exogenous increase in the knowledge base on the growth rate of per capita GDP.     

A consumer-based model of competitive diffusion: the multiplicative effects of global and local network externalities

Competitive diffusion of two incompatible technologies, such as PC vs. Macintosh, VHS vs. Betamax and so on, is studied under the framework of a spatial game in which consumers are distributed on a two-dimensional square lattice network. The consumers play coordination-like games with their nearest neighbors and imitate the most successful strategy in their neighborhood in terms of aggregated payoffs after each round. The effects of global network externality are realized in the dynamic payoff matrix of the game, and the framework of spatial game provides the model with the effects of local network externality. These two types of externalities are set as multiplicative, that is, as nonlinear. Both simulations and mean-field approximation show that not only total but also partial standardization (robust polymorphic equilibrium) occurs depending upon the parameters and initial configurations, even when there are positive effects of both global and local network externalities. Moreover, effects of innovation factors that alter paths toward a lock-in situation are studied. It is shown that both the timing and the size of the innovation factors matter for a disadvantaged technology in order to overwhelm a market.JEL Classification: C7, D8, O3We are obliged to Professor John Paul Boyd at the University of California, Irvine and our anonymous referees for their constructive comments.     

Strategic entry and externalities in groundwater resources: Evidence from the lab

This study uses economics experiments to extend the literature on common-pool resources by focusing on entry investment behavior in a stylized, spatially explicit aquifer. The model consists of a two-stage game, where participants make an entry decision in the first stage and, if they choose to enter, decide how much resource to extract in the second stage. Results show that entry behavior and groundwater pumping decisions are significantly affected by the underlying spatial externalities of the resource. In instances where the impacts of groundwater use are spread across all resource users, we observe both a greater number of users choosing to use the resource and a higher intensity of use. The results support expectations from the model that groundwater management policies should focus on entry in addition to decisions related to the volume of pumping. The results also discern the interplay of entry with both hydrogeologic characteristics of the resource and the option to exit and reveal that the option to exit increases the intensity of extraction as well as initial entry rates.     

The geography of market failure: Edge-effect externalities and the location and production patterns of organic farming

Perceptions of increasing land scarcity and negative impacts of chemical-based agriculture have led to increasing concern regarding the sustainability of food systems. Incompatible production processes among farming systems may lead to spatial conflicts and production losses between neighboring farms, and the magnitude of such losses may depend not only on the scale of each activity, but also on patterns of land use. Such conflicts can be classified as “edge-effect externalities”—spatial externalities whose marginal impacts decrease as distance from the border generating the negative impact increases. This paper tests the hypothesis that edge-effect externalities have influenced the location and production patterns of certified organic farms, using data from California Central Valley certified organic farmers. Using concepts from landscape ecology and spatial statistics, we investigate difference in parcel geometry and surrounding land uses between organic and non-organic parcels. Using a generalized method of moments (GMM) spatially autoregressive econometric model, we demonstrate that both parcel geometry and surrounding land uses influence the probability of a given parcel being certified organic. We conclude with suggestions for policies to encourage development of organic farming regions.     

Fishery externalities and biodiversity: Trade-offs between the viability of shrimp trawling and the conservation of Frigatebirds in French Guiana

Sustainable management of natural resources, and in particular fisheries, must take into account several conflicting objectives. This is the case in the French Guiana shrimp fishery for which profitability objectives imply a reduction in the fishing activity. On the one hand, this fishery has negative externalities on marine biodiversity due to discards. On the other hand, this fishery has positive externalities on the economy of the local community and interestingly enough on a protected seabird species in the area (the Frigatebird that feeds on discards). In this paper, we examine the viability of that system considering two sustainability objectives: an economic objective in terms of the profitability of the fishing activity, and a conservation objective in terms of the Frigatebird population. For that purpose, we have developed a dynamic model of that bioeconomic system and study here the trade-offs between the two conflicting objectives. It provides a means to quantify the necessary give and takes involving the economic and ecological objectives that would ensure a viable management solution. Our study confirms the relevance of the viability approach to address natural resource management issues, which should lead to the development of new tools for the arbitration of conflicting sustainability objectives. In particular, such tools could be used as a quantitative basis for cost–benefit analysis taking into account environmental externalities.     

Digital identity: How users value the attributes of online identifiers

This paper examines online identifiers from an economic perspective. It uses conjoint analysis survey techniques to develop empirical data on how users value the attributes of online identifiers. It is concerned in particular with three issues: (1) the degree to which identified subjects value increasing the scope of an identifier, i.e., the ability to use a single identifier to access services offered by several organizations; (2) the degree to which users’ choice may be constrained by switching costs; and (3) the value individuals place on privacy and data security relative to other attributes such as cost or scope. The survey population was located in South Korea. The results indicate that e-mail addresses dominate the world of online identifiers for ordinary consumers; that consumers highly value increased scope (e.g., single sign-on capabilities) and the security of their private data; and that switching costs are high.     

Gales of creative destruction and the opportunistic incumbent: The case of electric vehicles in California

This paper explores the introduction of electric vehicles in response to Californian regulatory pressures as an example of a disruptive technology. The central thesis is that this disruption may open the automobile market to new entrants but only if they collaborate with incumbent automobile manufacturers. This appears to support Schumpeter's argument that large incumbent firms possess innovation advantages over the small entrepreneurial entrant. However, these innovatory advantages lie in the downstream complementary assets required for success in the automobile market.     

Gales of creative destruction and the opportunistic incumbent: The case of electric vehicles in California

This paper explores the introduction of electric vehicles in response to Californian regulatory pressures as an example of a disruptive technology. The central thesis is that this disruption may open the automobile market to new entrants but only if they collaborate with incumbent automobile manufacturers. This appears to support Schumpeter's argument that large incumbent firms possess innovation advantages over the small entrepreneurial entrant. However, these innovatory advantages lie in the downstream complementary assets required for success in the automobile market.     

Bridging the gap in creative economy and ICT research: a regional analysis in Europe

ABSTRACT

Following Florida’s seminal work on the ‘creative class’ there is a great deal of interest concerning whether creativity, as an input, is important for regional growth. Answering this question requires developing a production framework that can distinguish creativity from other inputs. With data from Europe, this paper integrates the concept of information and communications technology (ICT) and the creative class into a theoretical production function. Findings reveal that not only is there a positive and interactive relationship between creative workers and ICT, but the combination of creative workers and ICT leads to higher levels of GVA growth. Moreover, creative workers were found to have a larger impact on growth in comparison with traditional human capital measures (i.e. graduates). Thus, findings from this research suggest that the creative class should not only pay attention to socio-economic preferences of individuals, but it must include wider social resources, such as ICT.     

The role of externalities and information aggregation in market collapse

We examine the role that belief, network externality, and information aggregation play in inefficient market collapses. After receiving consecutive negative shocks, some ex-ante identical Bayesian agents will be discouraged about the unknown state of the market they invest; therefore, they will stop investing. This decision will have two effects: first, it will cause agents to aggregate information through social/observational learning; second, it will decrease the network externality effect. We show that there might be an inefficient market collapse if the externality effect diminishes too much, and the cost of re-entry to the market is too high. We also analyze the effects of strategic delay and experimentation on the exit decision of the agents. I especially thank Thomas D. Jeitschko, Matthew Mitchell, B. Ravikumar Ted Temzelides. I also thank anonymous referees, an associate editor, John Conlon, Larry Samuelson, Troy Tassier, Stephen Williamson, and seminar participants of the University of Saskatchewan, Georgia Tech, Concordia University, University of Manitoba, Iowa Alumni Workshop, Midwest Economic Theory Conferences held at Indiana Bloomington, and Notre Dame, and 1st International Conference on Business, Management and Economics organized by Yasar University.     

Restrictive or expansive selection: the uneven role of tariff structure in improving market access

We estimate the effect of tariff reforms on market access from the Doha Round until the Great Recession. Gravity estimates yield significant effects of the variation in tariff structure. The change in the Mercantilist Trade Restrictiveness Index reveals that the change in tariff dispersion reflects a restrictive selection counteracting the effect of average tariff reductions. Restrictiveness is concentrated in East Asia and Pacific while, in Latin America and Caribbean, selection is expansive. We illustrate reforms in China, finding strong restrictive selection. Simulations highlight reforms with unchanged dispersion for their larger improvement in market access and a simultaneous improvement in welfare.     

Growing through trade in intermediate goods: the role of foreign growth and domestic tariffs

We show that pure Ricardian trade can account for the empirical evidence that domestic growth is more affected by foreign growth than by trade openness. To do this, we develop a two‐country model involving a backward economy that exchanges intermediate goods with a faster growing country. We obtain three main results regarding growth and welfare of the backward economy: (i) the growth‐enhancing comparative advantage is facilitated by faster foreign growth; (ii) the growth rate may be negatively affected or unaffected by a domestic tariff, while it is always positively impacted by foreign growth; and (iii) a domestic tariff could be welfare‐improving.     

The reallocation of workers and jobs in Russian industry

Gross job and worker flows in Russian industry are studied using panel data from a survey of 530 firms selected through national probability sampling. The data permit examination of several crucial measurement issues, including the timing and definition of employment and the role of reorganizations, and they contain rich information on firm characteristics. We find that new and reorganized firms display larger flows than unreorganized enterprises. Product market dispersion and managerial and dispersed outsider ownership are associated with greater worker churning, and unionization and concentrated outsider ownership with less. There is little evidence that the average firm's employment adjustments have become more responsive to adjustment costs during the transition, but private ownership and product market competition appear to increase responsiveness. JEL Classifications: E24, J23, J63, P23, P31.