Monday, September 19, 2005

More on bandwagons and network effects

In lecture 2 I spoke about the ideas of network externalities and complementary bandwagon effects introduced by Jeff Rolhfs, first in his pathbreaking article in the 1974 Bell Journal, and then more recently in his book and his Strategic Policy Research Institute paper Bandwagon effects and the Internet. Both these ideas help to explain the rapid take off of the Internet once the commercial conditions were right.

Of course bandwagons don't always get rolling. Greenstein (2003) "Jumping on bandwagons" recalls the failure of the Picturephone to take off in the 1970s. Greenstein also explains the impact of network externalities in terms of asymmetries above and below the "critical mass". The value to an individual user of a marginal addition to the network is small when the network is small, but can be much larger when the network is big. The positive feedback only kicks in when enough users have joined the network. This is why complementary bandwagon effects from applications can be so important.

In the lecture I also noted that Clements (2004) has a slightly different form of terminology for these effects. He stresses the difference between what he calls direct network effects and indirect ones. The direct effect is where the utility of an individual user is raised by the addition to the network of another user. The indirect effects occur via complementary (compatible) products. For example a DVD player becomes more valuable as the number of DVDs available to play on them increases (usually these systems have hardware and software elements). Clements explores the extent to which a market will "tip" to a single standard.

Sadly network effects might not always be good for consumers. Recent debates over the spread of viruses and other forms of malware have raised the possibility that the use of RSS feeds to enable blogs to reach a wider audience could be attractive also to virus spreaders. You have been warned!

Don't forget to look at my bibliography file for the full details of papers and books that I mention, and also for quick links to them.


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