eBulletin - Alan Dix (vfridge limited, aQtive limited and Lancaster University)


I was introduced to network effects theory by Wolfgang Koenig at his keynote to the BIT2001 conference: "Reconsidering Network Effect Theory - applied on information technology and telecommunication markets".

Network effects is the term given to goods where the possession of product A by one consumer affects the value of product B for some other consumer. The classic example being telephone usage where the value to any individual depends on their friends and colleagues also possessing telephones.

The literature focuses heavily on the way in which network effects break the assumptions underlying classical economic theory and can lead to sub-optimal equilibrium situations. For example, if everyone had a telegraph then it may have been very hard for telephones to break into the market even though they are a superior technology. The area has achieved some prominence as it has been cited in the Microsoft ant-trust cases.

There have been various attempts to model network effects, but again principally focused on trying to understand issues such as the emergence of (possibly sub-optimal) monopolies.

In contrast, my analyses of market ecology, lattice of value and market engineering are more orientated to understanding how to design and position products to maximise network effects to allow rapid self growth. Also, the main focus of my analysis has been in unsaturated market situations, that is entry point rather than monopoly/oligopoly situations. This is partly due to the context the analyses have developed - the strategic design of products for small startup companies.

some of my own related material

  the lattice of value - principles for designing products that exhibit self growth through network effects, focusing on web developers/users and other producer/consumer markets
  market ecology and market engineering - using models of interconnected internet markets to enable strategic design choices for product families that will exhibit self-growth

network effects resource pages

  Business 2.0 articles on Network Effects. various archive articles
  Stan Liebowitz' page on Network Effects. School of Management, University of Texas at Dallas
  Nicholas Economides' page on the Economics of Networks. Stern School of Business, New York University
  Hal R. Varian's link site on Network Economics. School of Information Management and Systems, University of California Berkeley

selected network effects articles

These are (unashamedly) from those I could read easily from online sources!

  Stan Liebowitz and Steve Margolis. "Network Externalities (Effects)" entry in The New Palgraves Dictionary of Economics and the Law, MacMillan, 1998.
short (5 page) overview/review article
dictionary entry
  Nicholas Economides. The Economics of Networks. International Journal of Industrial Organization. October 1996,
longer and detailed review paper (37 pages including 6 pages of references). I found the treatment a little confusing in places as the products being discussed are almost entirely network products (telecoms, railroads), whereas the terms network effect/network externalities are also used in a broader sense of networks of contacts between potential customers.
full paper
  Brynjolfsson, E. and C.F. Kemerer, "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market", Management Science, 42, (12), 1627-1647, December 1996
this paper builds an empirical model of prices for spreadsheets as an example of a good having strong network effects. At the time the paper was written he predominant spreadsheet was Lotus 1-2-3 and prophetically the paper notes that just as the change from CPM/Apple II to DOS allowed the growth of Lotus at the expense of VisiCalc, the change to Windows may open the way for Excel to win market share! the authors fit a multidimensional model, but one interesting effect was that the use of Lotus compatible menus was a stronger effect than actually being Lotus. That is despite the predominant position the Lotus brand was less important than the Lotus interface - perhaps a lesson for other IT and Internet products.
full paper in HTML or PDF
  Weitzel, Tim;‹Wendt, Oliver;‹von Westarp, Falk. Reconsidering Network Effect Theory. In: 8th European Conference on Information Systems (ECIS 2000);‹Wien, Österreich
much is this paper is a recent review and critique of network effect literature. The authors also use discrete event simulation to model different kinds of networks - those based on geographical closeness, which tend to be more cliquey, vs. those based on random interconnections, more like the Internet. As expected network effects were more likely to lead to runaway growth and monopoly in the randomly connected situation.
full paper (PDF)

some CSCW literature on critical mass

  Grudin J. (1988) Why CSCW applications fail: problems in the design and evaluation of organisational interfaces. In: CSCWÃ88 Proceedings of the Conference on Computer-Supported Cooperative Work, ACM SIGCHI & SIGOIS, pp. 85Á93
In this paper Grudin introduced the critical mass effect (and other design issues) into the CSCW vocabulary.
abstract and full paper in ACM digital library
  Andrew Cockburn , Harold Thimbleby, Reducing user effort in collaboration support, Proceedings of the international workshop on Intelligent user interfaces, p.215-218, January 04-07, 1993, Orlando, Florida, United States
This and Andy's thesis work are the first example I know where a deliberate attempt is made to design a CSCW product to avoid critical mass effects. It is only recently that I have realised how much this had influenced me in my CSCW and the Web analysis below.
abstract and full paper in ACM digital library
  A. Dix (1997). Challenges for Cooperative Work on the Web: An analytical approach. Computer-Supported Cooperative Work: The Journal of Collaborative Computing, 6 pp. 135-156.
In this paper I applied critical mass thinking to web interfaces and discuss the various ways a groupware design can avoid critical mass problems and achieve penetration. This includes exploiting open cliques, raising the zero penetration benefit, etc.
earlier version of paper


Toys for the Boys or Jobs for the Girls. Distinguished Guest Lecture. BCS Cheltenham and Gloucester Branch. 2.15pm Wed. 14th Nov. 2001, CGCHE, Cheltenham, UK.

marketplace ecology - managing the interconnected market groups of the Internet. understanding the way feedback between different groups lead to market growth. bulletin

the lattice of value. principles for designing complementary products that foster their own spread. bulletin

network effects. brief review of network effects and externalities literature in relation to market ecology. bulletin

Cyber-economies and the Real World
keynote at SAICSIT'2001 - South African Institute of Computer Scientists and Information Technologists Annual Conference. Pretoria, 25-28 September 2001. extended abstract and slides

diversity density Measuring the information loss in the supply chain and changes in the new economy. bulletin

artefact + marketing = product Internet products are formed not just by design, but by how they are sold. bulletin
also in Interfaces, no. 48, Autumn 2001

in a strange land: modelling and understanding cyberspace.
Human-Computer Interaction in the 21st Century". Graz, Austria, 13th January 2001
talk paper and slides

market ecology and market engineering understanding the networked market and designing products to transform it. bulletin

understanding the e-Market and designing products to fit.
E-commerce - issues and directions, London, Jan 2000
talk abstract and slides

the web sharer vision - the producer/consumer distinction breaks down on the web, a whole new class of web products will emerge for the new class of web sharers. bulletin

PopuNET - pervasive, permanent access to the Internet. bulletin

leave your email address here for updates

http://www.hiraeth.com/alan/ebulletin/network-effects/ © Alan Dix, November 2001