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Network Externalities and Technology Adoption: Lessons From Electronic Payments
Abstract
We analyze the extent of network externalities for the automated clearinghouse (ACH) electronic payments system using a panel dataset on bank adoption and usage of ACH. We develop three methods. The first examines the clustering of ACH adoption. The second examines the impact of market concentration and the size of competitors on ACH adoption. The third examines the impact of ACH adoption by small branches of large banks on local competitors. These methods separately identify network externalities from technological advancement, peer-group effects, economies of scale, and market power. We find evidence that the network externalities are moderately large.
... Koski/Kretschmer (2005) on the other hand analyze 32 industrialized countries in the period 1991-2000 in the context of the start-up of GSM 2G network and conclude that the standardization considerably accelerates the entry 47 Global System for Mobile telecommunications 48 Time-Division Multiple Access 49 Code-Division Multiple Access and diffusion of the 2G technology, and that the price competition within standards is less aggressive than the competition among the standards. Surprisingly, the authors find that the liberalization of the fixed-line telephony market itself accelerates the commercialization of GSM 2G network. ...
... Somewhat related departure from the assumption that total network size matters most can be found in empirical papers which argue that social networks are mainly local and that local geographical network size is therefore the relevant network measure. For example, Gowrisankaran/Stavins (2004) argue that network effects in adoption and usage of electronic payments via the Federal Reserve's ACH are predominantly local in nature. The authors make the assumption that all interaction effects are captured by geographical proximity, as they do not have more detailed data on the direct interaction of (local) banks. ...
... The authors identified network effects and conclude that network externalities are important for banks' adoption decisions and that these externalities are only partially internalized. Tucker (2005) use the same data on the ACH adoption as Gowrisankaran/Stavins (2004) and extend the original model. She (Tucker, 2005) treats the problem as a two-sided market problem, where both parties have to adopt a technology and shows that positive network effects are present in the ACH market. ...
This paper reviews selected empirical literature most relevant to network economy. Our selection includes empirical studies assessing network effects and strategies in different sectors and industries. Since network effects-the increase in value of consuming a product if many consumers use the same product-are a feature of many markets and in particular of many high-technology products, we have tried to include a wide variety of empirical literature over the past decades and to make a user-friendly guide for future researches in this important field. Our intention is not to steer future researchers in any particular direction, but to emphasize the need for closer analysis of the consumer interactions and the decision-making process in network industries, as well as better understanding of how network effects operate.
... In this vein, Gowrisankaran and Stavins (2004) study the adoption of clearinghouse services by banks. The clearinghouse provides a very efficient method of moving funds across banks so Gowrisankaran and Stavins (2004) expect a network effect as more local banks (the ones a bank is most likely to trade with) adopt. ...
... In this vein, Gowrisankaran and Stavins (2004) study the adoption of clearinghouse services by banks. The clearinghouse provides a very efficient method of moving funds across banks so Gowrisankaran and Stavins (2004) expect a network effect as more local banks (the ones a bank is most likely to trade with) adopt. Gowrisankaran and Stavins (2004) take several approaches including assuming that large banks are exogenous to small banks, so for instance, Citibank's choice can affect the Bank of Cape Cod but not vice versa. ...
... The clearinghouse provides a very efficient method of moving funds across banks so Gowrisankaran and Stavins (2004) expect a network effect as more local banks (the ones a bank is most likely to trade with) adopt. Gowrisankaran and Stavins (2004) take several approaches including assuming that large banks are exogenous to small banks, so for instance, Citibank's choice can affect the Bank of Cape Cod but not vice versa. ...
The chapter has ten sections, which cover the theory of two-sided markets and related empirical work. Section 1 introduces the reader to the literature. Section 2 covers the case of markets dominated by a single monopolistic firm. Section 3 discusses the theoretical literature on competition for the market, focusing on pricing strategies that firms may follow to prevent entry. Section 4 discusses pricing in markets in which multiple platforms are active and serve both sides. Section 5 presents alternative models of platform competition. Section 6 discusses richer matching protocols whereby platforms price-discriminate by granting access only to a subset of the participating agents from the other side and discusses the related literature on matching design. Section 7 discusses identification in empirical work. Section 8 presents approaches to estimation. Section 9 discusses estimation in empirical work. Finally, Section 10 concludes.
... First, the foundation of network externalities is that the consumer's individual-level benefit increases with a larger number of users (Katz and Shapiro 1986). However, very limited research has provided empirical evidence at the individual level (Gowrisankaran and Stavins 2004). Second, past research has not generated insights into some nuanced, yet important, properties of network externalities. ...
... These studies often directly assume that network externalities exist. Little research has examined network externalities at the root: the existence and key properties at the individual level (Gowrisankaran and Stavins 2004). 3 In online video games, the consumption utility depends not only on game attributes, but presumably also on the number of active subscribers who can sign in to play. ...
... Once introduced to the market, product sales typically experience periods of growth, maturity, and decline. In the literature, network externalities are often treated as static or constant over time (e.g., Gandal 1994; Gowrisankaran and Stavins 2004 ). This approach , once implemented empirically, only captures network externalities specific to a particular period or the average effect across different periods. ...
Video games have become a major contributor to the USA and global economy. This paper studies network externalities in the online video game industry. Even though network externalities are recognized as a major driver of new product diffusion, testing the existence and the impact of network externalities at the individual level has been a challenge. By employing online product ratings in the estimation, we find that for online video games: (1) a larger installed base generates higher product ratings by individuals; (2) network externalities exhibit nonlinear dynamics over product life cycle—nonsignificant initially, highly significant next, and less significant in the later period; and (3) network externalities differ across consumer segments: the impact of the installed base is stronger on less-experienced consumers than on more-experienced ones. Our results suggest that network externalities should be treated as a dynamic rather than a time-invariant phenomenon and heterogeneous rather than homogeneous across consumers.
... of Economic Analysis (BEA) reporting convention. 12 We then count the number of 2017 season users in each county, which is used to calculate the log of the installed user base in the own county (m ct−1 ) as well as in other nearby counties (n ct−1 ). Similarly, we count the number of users in each county who did not play YFB in 2017 but did so in 2018. ...
... Notice that we allow the effect of the team's performance to be mediated by the county's distance from the stadium, as individuals may be less excited or influenced by the local team's performance if that team is located farther away from where they live or work. If playing fantasy sports is a substitute for going to the stadium to watch a game, then distance 12 Virginia is divided into 95 counties and 38 independent cities that are considered county-equivalents for Census purposes. For statistical purposes, however, the BEA combines some of the cities with the county to which they once belonged, which we prefer for our study. ...
We examine the extent to which network effects on a digital platform are geographically local. Focusing on the fantasy sports market, we find that the size of a county's existing user base on the platform significantly impacts the number of new adopters in that county, while the size of the user base in nearby counties does not. We also find evidence that network effects are heterogenous across income levels. Guided by these results, we demonstrate that the initial distribution of users across counties can significantly influence the growth of the network over time, and draw implications for optimal seeding strategies.
... 9 This section draws heavily from Mancini-Griffoli and others (2018) and Adrian and Mancini-Griffoli (2019b), plus Barontini and Holden (2019), Boar and others (2020) and King (2020). transactions), economies of scale (decreasing average costs, including high fixed development and maintenance costs), and economies of scope, (gains from aggregating data to provide additional services - Bolt, 2005, andGowrisankaran andStavins, 2004). However, some private money issuers may not internalize the social cost of possible systemic disruptions from operational failure, including cyberattacks, and thus may underinvest in security. ...
... 9 This section draws heavily from Mancini-Griffoli and others (2018) and Adrian and Mancini-Griffoli (2019b), plus Barontini and Holden (2019), Boar and others (2020) and King (2020). transactions), economies of scale (decreasing average costs, including high fixed development and maintenance costs), and economies of scope, (gains from aggregating data to provide additional services - Bolt, 2005, andGowrisankaran andStavins, 2004). However, some private money issuers may not internalize the social cost of possible systemic disruptions from operational failure, including cyberattacks, and thus may underinvest in security. ...
... (b) Problems associated with monopolistic behavior: payment services tend toward natural monopolies due to strong network externalities, the economies of scale, and the gains from using data to provide additional services (Gowrisankaran & Stavins, 2004;Bolt & Humphrey, 2005). It is possible that large private payment firms could offer partial, inadequate or expensive services. ...
... Participants would be forced to exit the market or become formalized (Agarwal & Kimball, 2015). This is a relevant motive in Thailand where the gray and black market activities accounted for more than 60-70% of GDP during 1999-2004(Bunjerdkit, 2007. The size black market in Thailand, estimated to be 13% of GDP (Havoscope, 2012), are dominated by gambling, human trafficking, and drugs. ...
... 9 This section draws heavily from Mancini-Griffoli and others (2018) and Adrian and Mancini-Griffoli (2019b), plus Barontini and Holden (2019), Boar and others (2020) and King (2020). transactions), economies of scale (decreasing average costs, including high fixed development and maintenance costs), and economies of scope, (gains from aggregating data to provide additional services - Bolt, 2005, andGowrisankaran andStavins, 2004). However, some private money issuers may not internalize the social cost of possible systemic disruptions from operational failure, including cyberattacks, and thus may underinvest in security. ...
... 9 This section draws heavily from Mancini-Griffoli and others (2018) and Adrian and Mancini-Griffoli (2019b), plus Barontini and Holden (2019), Boar and others (2020) and King (2020). transactions), economies of scale (decreasing average costs, including high fixed development and maintenance costs), and economies of scope, (gains from aggregating data to provide additional services - Bolt, 2005, andGowrisankaran andStavins, 2004). However, some private money issuers may not internalize the social cost of possible systemic disruptions from operational failure, including cyberattacks, and thus may underinvest in security. ...
This paper examines key considerations around central bank digital currency (CBDC) for use by the general public, based on a comprehensive review of recent research, central bank experiments, and ongoing discussions among stakeholders. It looks at the reasons why central banks are exploring retail CBDC issuance, policy and design considerations; legal, governance and regulatory perspectives; plus cybersecurity and other risk considerations. This paper makes a contribution to the CBDC literature by suggesting a structured framework to organize discussions on whether or not to issue CBDC, with an operational focus and a project management perspective.
... Macroeconomic changes that cause adjustment in exchange rates of currencies are not reflected in any way in BitCoin price movements implying that its price volatility cannot be easily hedged. Finally, BitCoin faces the problem of network externalities in its adoption (Gowrisankaran and Stavins 1999), as its benefit in exchange is positively correlated with the number of users (Plassaras 2013;ECB 2012). Among all BitCoin features that we have identified and analyzed, eventually, price volatility is the one with the largest differences compared to standard currencies, such as US dollar, Euro, Yen, British Pound. ...
... On the other hand, if only a few consumers use BitCoins, businesses have little incentives to invest into the equipment for processing BitCoin payments for their goods and services. This is a well-known problem of network externalities (Gowrisankaran and Stavins 1999). Hence, one of the main BitCoin challenges in becoming a global currency is to convince users to use it in their purchases and businesses to accept it as payment form for their goods and services (Berentsten 1998;ECB 2012;Plassaras 2013).Yermack (2014)argues that BitCoin largely fails to be a global medium of exchange as it is used to a limited extent to intermediate the exchange of goods and services. ...
This paper identifies and analyzes BitCoin features which may facilitate BitCoin to become a global currency, as well as characteristics which may impede the use of BitCoin as a medium of exchange, a unit of account and a store of value, and compares BitCoin with standard currencies with respect to the main functions of money. Among all analyzed BitCoin features, the extreme price volatility stands out most clearly compared to standard currencies. In order to understand the reasons for such extreme price volatility, we attempt to identify drivers of BitCoin price formation and estimate their importance econometrically. We apply time-series analytical mechanisms to daily data for the 2009–2014 period. Our estimation results suggest that BitCoin attractiveness indicators are the strongest drivers of BitCoin price followed by market forces. In contrast, macro-financial developments do not determine BitCoin price in the long-run. Our findings suggest that as long as BitCoin price will be mainly driven by speculative investments, BitCoin will not be able to compete with standard currencies.
... No wonder, this shock move by the Indian government in 2016, has generated a plethora of studies that analyse the impact of demonetisation on the Indian economy. Ghosh et al (2017) note that given the dependence of the Indian economy on cash, demonetisation was a severe measure. They state that when demonetisation was announced, 95 per cent of all transactions in the country were in cash. ...
The aim of the paper is to analyse the extent to which digital payments in India have diffused since its introduction around 2010. The paper measures diffusion in terms of the rates of growth of digital payments in both volume and value terms and then employing the sectoral system of innovation framework to identify the factors that are crucial for its faster diffusion. The paper shows that despite its existence for more than a decade, digital payments have not diffused in value terms. The main factor identified for its slower diffusion is a decline in the rate of growth of real per capita income.
... Across all consumers, that number was just 21 percent. 5 Network effects are again important here: If fewer consumers use a means of payment, then fewer merchants will be willing to accept it, a situation which, in turn, further disincentivizes its use (Rochet and Tirole, 2003;Gowrisankaran and Stavins, 2004). Additionally, if some individuals have no choice but to use cash, they may find they are unable to access certain parts of the economy (Tarlin, 2021). ...
Should policymakers aim to expand access to bank accounts? When financial exclusion is due to frictions that prevent banking from operating efficiently, intervention may be justified. Applying simple economic principles, we highlight possible frictions that may give rise to inefficient exclusion in the United States, and we assess their importance using insights from data and the academic and policy literature.
... here is similar to other empirical studies on adopting network technology in different industries (Gowrisankaran and Stavins, 2004). ...
This paper explores the adoption choice of electronic medical records by U.S. hospitals, which could exhibit strategic complements or substitutes. I find complementarities in adoption through a reducedform analysis with instruments for unobserved market characteristics. I further develop a dynamic oligopoly model to allow for strategic timing incentives that are missing in the static model. Adopting a dominant local vendor could increase perperiod profits from adoption by 9.2% over choosing a marginal vendor. A counterfactual analysis suggests an incentive program rewarding coordination, not just adoption, is more effective in achieving interoperability, especially before the widespread adoption of the technology.
... 1153) Lin and Lu (2011) Network effects "Network effects refer to the idea that a product becomes more valuable as its user base expands (Katz and Shapiro, 1994). For example, the value of an electronic payment system to a commercial bank increases with the number of banks that adopt the same system (Gowrisankaran and Stavins, 2004)." (p. ...
Purpose
Social networking sites (SNS) follow the same diffusion pattern and are subject to the same phenomena as other technologies (e.g. QWERTY keyboard, Microsoft Office and VHS) that were subject to increasing returns. Since they may lock-in users, increasing returns significantly alter the way a technology is used and should be managed. The purpose of this paper is thus to verify if SNS are subject to increasing returns and, if so, to better understand their impacts in this context.
Design/methodology/approach
A research model that combines path dependency theory (PDT) tenets with the push-pull-mooring (PPM) model of information technology (IT) switching was developed and tested with data collected from 416 SNS users via a field survey. Participants were voluntary students at a North American university enrolled in a compulsory undergraduate course in business administration. Partial least square analysis structural equation modeling (PLS-SEM) was used to validate our research model and test our hypotheses.
Findings
Results show that SNS are subject to three forms of increasing returns: those stemming from device complementarity, learning and adaptive expectations. In addition, the findings show that increasing returns stemming from SNS use have the potential to lock-in SNS users by increasing their switching costs.
Practical implications
SNS users should be careful when using an SNS since such use can create a path that is self-reinforced and that can lock them due to the increasing returns it yields. SNS vendors/providers need to learn how to manage increasing returns if they want to foster continued use of their SNS and/or poach users from their competitors. Lastly, SNS regulators should revise or put in place new governance mechanisms since increasing returns, when properly leveraged, may undermine fair competition by allowing companies to lock-in users and lock-out competitors.
Originality/value
This study contributes to IS research by: (1) empirically demonstrating that increasing returns are present in the context of SNS use, (2) identifying increasing returns as key antecedents of user switching costs, (3) validating a theoretical framework that allows for the appraisal of PDT tenets in a variance model and (4) instantiating PDT tenets at the individual level.
... See, for example,Manski (1993);Glaeser, Sacerdote, and Scheinkman (1996);Brock and Durlauf (2001); andGowrisankaran and Stavins (2004).2 SeeMarshall (1967) for a history of unionism in the South and a discussion of the role of race. ...
... Personal choice on technology adoption and implementation has been a topic of major interest to both researchers and practitioners in many fields, such as consumers' selection of local telephone service/ wireless service in marketing research (Narayanan et al. 2007, Iyengar et al. 2007), consumers' adoption of electronic service or automated teller machines in finance (Gowrisankaran andStavins 2004, Yang andChing 2014), physician adoption of different types of EHR systems in healthcare (Ash et al. 2003, Zheng et al. 2010, Johnson et al. 2014, Sykes et al. 2011, Davidson and Chismar 2007, Lapointe and Rivard 2007, and many others. However, healthcare IT has been the victim of a slow uptake at the individual level, where, despite a governmental or organizational push, physicians and staff have been slow to come on board and to implement or assimilate IT in their daily work for many reasons (Blumenthal 2009, Angst et al. 2010, Mishra et al. 2012, Conn 2014. ...
Studies on how social influence impacts individuals’ social learning during the technology adoption process have increased over the last few decades. However, few studies have examined the social learning effects on individual consumers’ learning at the post-adoption stage, or long-term usage. The present study intends to fill this gap. We construct a Bayesian learning model to investigate consumers’ learning process at the post-adoption stage and how social learning effects influence individuals’ learning at this stage. The model result shows that, among the two social learning effects, influential peer effects (early adopters) are not significantly different from general peer effects at the post-adoption stage; i.e., users no longer treated early adopters differently from general peers. To the best of our knowledge, this is one of the first studies that investigates social learning effects on consumers’ learning at the post-adoption stage by using a Bayesian learning model, which uncovers the underlying mechanism of people’s long-term use of technology.
... More recently, two papers studied network externalities for ACH. Gowrisankaran and Stavins (2004) find support for significant network externalities, which they ascribe to technological advancement, peer-group effects, economies of scale, and market power. Ackerberg and Gowrisankaran (2006) identify large fixed costs of bank adoption as the barrier to greater use of ACH transactions and thus to society's capturing the accompanying potential cost savings. ...
... The system can be called "safe" when it enjoys both considerable trust and popularity among the users (Korze , 2006). That is why the main goal of this paper is to evaluate the effectiveness of immediate payment system management for Polish financial market operators as a determinant of safety and to assess the effect of minimizing the risk of their actions (Gowrisankaran and Stavins, 2004). ...
... Our findings contribute to the existing literature in a number of ways. First, while other papers have explored the extent to which firms differentiate or coordinate when adopting network technologies (e.g., Augereau et al. 2006, Gowrisankaran and Stavins 2004, Desai 2014, Lin 2015, our paper is the first to our knowledge to examine explicitly the role of market structure in shaping the market equilibrium adoption outcomes. Our data allow us to measure market competition in the hospital setting using information on patient admission and to examine how the extent of agglomeration changes as the competitive landscape changes. ...
We examine hospital Electronic Medical Record (EMR) vendor adoption patterns and how they relate to hospital market structure. As in many network technology adoption decisions, hospitals face countervailing incentives to coordinate or differentiate in their choice of vendors. We find evidence of substantial agglomeration on EMR vendors, which increases as hospital markets become more competitive. These findings suggest that incentives to coordinate dominate incentives to differentiate overall, and the relative balance grows stronger in favor of coordination as markets become more competitive. Our findings also have important implications regarding antitrust policy. A potential downside of hospital consolidation—increased obstacles in information sharing due to vendor differentiation—should be taken into account in evaluation of hospital mergers.
... This effect has previously been documented as driving adoption of technologies such as home computers [35], electronic payments [36], and mobile phones [37]. Moreover, network externalities theory has been used to explain adoption and growth of social media platforms [38][39][40] as well as showing a significant role in the adoption of traditional customer relationship management (CRM) systems [41]. ...
The rise of social media technology has led to new customer relationship management tools that engage customers more easily and directly (social customer relationship management, SCRM). However, the usefulness of SCRM is contingent upon a successful adoption by an organization. Various technology adoption theoretical frameworks have been proposed for social media technologies generally, and for SCRM specifically. This paper extends the literature by exploring network externalities as a potential driver of SCRM adoption in organizations by surveying 363 supply chain professionals regarding their behaviors and uses of SCRM. The results suggest that network externalities have a substantial effect on adoption of SCRM in business organizations and that a perception of higher network externalities has a positive effect on adoption. This implies that organizations should select SCRM systems with better network externalities and also that they should educate their workforce about those strong network externalities leading up to the adoption.
... Our findings contribute to the existing literature in a number of ways. First, while other papers have explored the extent to which firms differentiate or coordinate when adopting network technologies (e.g., Augereau et al. 2006, Gowrisankaran and Stavins 2004, Desai 2014, Lin 2015, our paper is the first to our knowledge to examine explicitly the role of market structure in shaping the market equilibrium adoption outcomes. Our data allow us to measure market competition in the hospital setting using information on patient admission and to examine how the extent of agglomeration changes as the competitive landscape changes. ...
... Another type of externality generally associated with ICT is network externality, which arises when the value of a product or service increases as it is adopted by more users (Brynjolfsson and Kemerer, 1996). 2 An early theoretical discussion of network externalities can be found in Katz and Shapiro (1985), in relation to consumption externalities, whereby consumers derive more utility from participating in a network depending on the number of people using the same network, the variety of products that a network provides, and the quality of the post-purchase service network. Several empirical contributions support the presence of network externalities linked to ICT, for example, in relation to the computer spreadsheet market (Gandal, 1994), the diffusion of home computers (Goolsbee and Klenow, 2002), and electronic payment (Gowrisankaran and Stavins, 2002). ...
Using company-level data for the US we study the productivity effects of knowledge spillovers, induced by the diffusion of ICT in the markets where companies operate. We adopt multiple spillover proxies and account for firms' absorptive capacity and lagged effects. Our results show that intra-industry ICT spillovers have a
contemporaneous negative effect while the impact of inter-industry spillovers is positive. The overall productivity effect of ICT is negative, except for those companies with a strong absorptive capacity. However, after a 5-year lag the overall spillover effect turns positive while the role of absorptive capacity diminishes as a consequence of decreasing learning costs and more accessible technology.
... Stavins [48] (the electronic payment system), Wang et al. [84] and Block and Koellinger [19] (Internet instant messaging services) and Lai et al. [58] (the e-business). Most of the literature cited above focuses on positive network externalities. ...
This paper presents a theoretical framework for studying peer effects in the diffusion of innovations. The underlying mechanisms of peer effects are generally under-discussed in existing studies. By investigating diffusion processes in the real world and reviewing previous studies, we find that information transmission, experience sharing and externalities are the basic mechanisms through which peer effects occur. They are termed as information effect, experience effect and externality effect, respectively. The three effects could occur through different types of relationships in a social network. Each of them plays a different role at different stages of a diffusion process. A simulation model incorporating multiple effects in a multiplex network is developed to provide a theoretical study. We simulate the experience effect and the externality effect in a context of rural diffusion. It generates the widely acknowledged patterns of diffusion in various scenarios. The experiments conducted using the model show that peer effects as a whole can be substantially misestimated if the underlying mechanisms are ignored.
... For example, in networks of companies, where the interactions between those companies take place on the consumer market, cooperation may be linked to the adoption of certain technologies or production processes, which require initial investment but may benefit the market as a whole (e.g. Gowrisankaran and Stavins, 2002). Here, a governing agency may want to incentivise certain key players, in the hope that others follow driven by market dynamics. ...
... Compatibility and interface standardization introduces technology standards to facilitate communication and ensure product compatibility. The economic phenomenon associated with this type of standardization is network externalities, the theory of which posits that the value of standardization depends on the number of adopters (Gowrisankaran and Stavins 2002). Interface standardization requires information technology (IT) and process standardization (Venkatesh and Bala 2012). ...
Business process management (BPM) is an acknowledged source of corporate performance. A well-established element of the BPM toolbox by which organizations intend to tune the performance of their processes is business process standardization (BPS). So far, research on BPS has predominantly taken a descriptive perspective, analyzing how BPS affects different dimensions of process performance (e.g., cost, quality, time, flexibility). Only very few studies capitalize on the mature body of descriptive BPS knowledge to assist in determining an appropriate BPS level for an organization‘s processes. Moreover, these studies do not resolve the BPS trade-off, i.e., the partly conflicting effects of BPS on process performance. To address this research problem, we propose a decision model that provides guidance on how to determine an economically appropriate BPS level for a business process. We thereby adopt the design science research (DSR) paradigm and draw from the body of knowledge on BPS as well as value-based management. We evaluated the decision model by discussing its design specification against theory-backed design objectives. We also validated the model’s applicability and usefulness in a real-world case where we applied the decision model and a prototypical implementation to the coverage switching processes of an insurance broker pool company. Finally, we challenged the decision model against accepted evaluation criteria from the DSR literature.
Full-text: http://www.fim-rc.de/Paperbibliothek/Veroeffentlicht/468/wi-468.pdf
... The direct benefits derive from interaction between users, while the indirect ones derive from the producers, who are motivated by economies of scale to develop new goods and services that are compatible with this technology. In the financial context, the theory of network externalities has been applied in the study of mobile banking (Gowrisankaran and Stavins, 2004), ATM networks (Kauffman and Wang, 2002) and clearing and settlement houses (Ackerberg and Gowrisankaran, 2003). The results obtained by Kauffman and Wang (2002) show that banks which share their ATM networks enjoy additional benefits from the growth of their own individual networks. ...
This paper presents a quantitative approach to the potential demand of formal financial services offered from the unique platform launched under the name of Peru Model (Modelo Peru´) for financial inclusion. It is based on the creation of an ecosystem for mobile financial services that rely on electronic money. The aim is twofold. First, to extend access to formal financial system to most of the population. Second, to minimize the perceived barriers to financial inclusion: distance, fees, documents required, security and trust. We quantify the number of potential customers of electronic money and divide them into three categories: Early Adopters, Majority Adopters and Late Adopters.
... Na tego typu rynkach występuje tzw. efekt sieciowy , na skutek którego użyteczność ekonomiczna dla obu grup uczestników wzrasta wraz z przyłączaniem się do platformy nowych podmiotów [Gowrisankaran, Stavins 2004, s. 260-276]. Dlatego w celu uzyskania pozycji szeroko rozpowszechnionej i budzącej zaufanie waluty Bitcoin musi się stać środkiem wymiany w legalnym e-biznesie. ...
This paper concerns a problem of the usage of virtual currency Bitcoin in e-commerce and donations for non-profit organizations. The aim of the work is to determine the characteristics of the legal businesses accepting Bitcoin, applied methods of acceptance and the share of Bitcoin in the total value of sales. Empirical results are based on the survey study, which included 111 online vendors from 35 countries. The obtained results allowed to determine the range of acceptance of Bitcoin worldwide and to recognize vendors, including such factors as business profile, location, industry, geographical coverage and the scale of its operations. The results proved that payment integrators played a very important role in the processing of Bitcoin payments. At the same time, however, there was observed a little inter- est from customers for using Bitcoin for payments.
... efektów sieci, a w toku dotychczasowych badań stwierdzono ich występowanie m.in. na rynku kart płatniczych i płatności elektronicznych [Saloner, Shephard 1995; McAndrews, Rob 1996; Van Hoove 1999; Guibourg 2001; Gowrisankaran, Stavins 2002]. ...
... For example, the more users an instant messaging service has, the more value it accumulates; in turn, its increased value attracts more users. For a commercial bank, more banks using a certain electronic payment system corresponds to a greater value of that payment system (Gowrisankaran and Stavins, 2004). However, network externalities do not necessarily account for all online herding behavior. ...
Purpose
– The purpose of this paper is to examine information cascades in the context of users’ e-book reading behavior and differentiate it from alternative factors that lead to herd behavior, such as network externalities and word-of-mouth effects.
Design/methodology/approach
– This paper constructed panel data using information concerning 226 e-books in 30 consecutive days from Sina.com’s reading channel (Book.Sina.com.cn) from October 2, 2013, to October 31, 2013 of the same year in China. A multinomial logit market-share model was employed.
Findings
– E-books’ ranking has a significant impact on their market share, as predicted by informational cascades theory. Higher ranking e-books’ clicks will see a greater increase as a result of an increase in clicks ranking. Due to the information cascades effect, review volume had no impact on the market share of popular e-books. Total votes had a powerful impact on the market share of e-books, showing that once information cascade occurred, it could be enhanced by the increase in total votes. The total clicks of e-books had a significant impact on their market share, suggesting that online reading behavior would be influenced by network externalities.
Practical implications
– As important information, the ranking or popularity of e-books should be carefully considered by online reading web sites, publishers, and authors. It is not enough for the authors and publishers of e-books to simply pay attention to the content. They should design their marketing strategies to allow network externalities and informational cascades to work for them, not against them. Online reading web sites should also focus on eliminating certain behavior, such as “brush clicks” and “brush votes,” in order to prevent an undesirable information cascade due to false information.
Originality/value
– To the best of the knowledge, this is the first study to examine information cascades in the context of users’ e-book reading behavior. Moreover, this study can help other researchers by utilizing a large sample of daily data from one of the earliest online reading platforms in China.
The purpose of the paper is to investigate the challenges and implications related to blockchain adoption in the private and public sectors, and from the entrepreneurs’ perspective. Based on 46 semi-structured interviews, a data-driven conceptual framework is proposed focussing on the environmental, organizational and technological challenges of blockchain adoption. The framework includes expected socio-economic value of blockchain adoption at the ecosystem level from a multi-stakeholder perspective: organizations and industries, end-users and society, public sector, and start-ups and entrepreneurs. The paper highlights the differences between permissioned and permissionless blockchains and identifies new constructs in blockchain technology adoption.
This paper discusses the empirical identification of network effects in light of the reflection problem of Manski. I argue that models of indirect network effects present reasonable exclusion restrictions to address the challenges of the reflection problem.
The interdependence between electric vehicle (EV) adoption and charging station deployment could lead to multiple equilibria. Under certain market conditions, the issue of critical mass arises and a market failing to overcome this hurdle would revert to a no‐adoption outcome. Using panel data of EV sales and charging stations across U.S. Metropolitan Statistical Areas (MSA's), we find that more than half of the MSA's face critical mass constraints and that a subsidy policy targeting these critical‐mass constrained MSA's could be much more effective in promoting EV adoption than the current uniform policy.
Managerial decisions on the adoption of innovative technologies by a firm are made under conditions of uncertainty and must account for network externalities that imply the benefit of a technology is received not only from its intrinsic payoff, but also from the size of the network of other adopters. The theoretical model presented in this study demonstrates that for firms evaluating information technology investment with network effects key determinants of the technology selection pattern are adoption reversibility and switching costs. If switching costs are sufficiently high to make technology adoption irreversible then safer established technologies have an advantage as choosing a riskier untested technology opens the firm to the risk of being stranded without a network of followers. With lower switching costs, the technology adoption decision is reversible which provides an advantage to riskier untested technologies. A discussion of empirical evidence on adoption patterns in information technology provides application for the theoretical model.
Evidence shows that ultra-poor households are typically unable to participate in mainstream poverty alleviation programmes. In response, an international NGO called BRAC in Bangladesh implemented the Targeting the Ultra-Poor (TUP) programme that explicitly targets those living below $0.60-$0.70/day. The innovative scheme combines the provision of income generating assets with an integrated approach that includes multifaceted training on entrepreneurial activities, health, nutrition, social and political awareness training over a period of two years. A number of papers have established the positive impact of the programme on various socioeconomic indicators of participants and the positive spill-overs to non-participants. This is the first paper to evaluate the effects of TUP on nutritional outcomes of children under 5 using data from a randomized control trial covering 26997 households and panel data over a four year period. We find large improvements in nutritional outcomes of children in participant households. The probability of wasting reduces by 11 percentage points (pp) and underweight by 30pp. Increased duration of exclusive breastfeeding, and preventive services such as vitamin A appear to be important drivers of these improvements. Spill-over effects on children from non-participant, but also poor, households are generally half the size of the main effects. No effects were found on children from non-poor households, suggesting that behavioural changes are more likely to be adopted by groups of similar socioeconomic status. We conclude that asset transfer programmes such as the TUP can have significant positive health effects which can contribute to assessing the programme’s cost-effectiveness.
The Graduation Approach to poverty reduction is inextricably bound up with programmes promoting financial inclusion. Proponents for the approach see it guiding a series of interventions that encourage poor households to ‘graduate’ into ‘mainstream development programmes’ which are centred on the provision of credit and other financial services (BRAC 2014). Indeed, the approach has been presented as a way to address the needs of those “too poor for microfinance services” (UNHCR 2014). The presumption is that the development and poverty reduction needs of ‘graduates’ will be well served by financial inclusion initiatives.
Recent interventions by influential development actors have sought to deepen the policy connection between graduation approaches and financial inclusion initiatives, including through the use of electronic payments systems (EPSs). The Ford Foundation and the Consultative Group to Assist the Poor (CGAP) recently called for ‘Graduation 2.0’ approaches that would establish and promote the “impact of financial services in the graduation approach and how Graduation Approaches are or could be synergistic with national financial inclusion initiatives, social safety nets and large-scale digitization of social transfers” (CGAP 2017).
This call parallels the efforts of the Better than Cash Alliance (BtCA) to promote the diffusion of EPSs in developing countries. Funded by Visa, MasterCard, Citigroup, the Gates Foundation and USAID, the BtCA advocates public investment in EPSs to facilitate their use to expand the reach of private suppliers of services in payments, savings, insurance and loans. This includes calls on governments to use EPSs to make cash transfer and broader social programme payments to encourage the financial inclusion of some households even before their graduation from extreme poverty.
The promotion of financial inclusion as a central tool in graduation and broader poverty reduction efforts rely on two widely cited propositions: first, the view that greater access to all types of financial services can universally (and in itself) contribute to poverty reduction and broader economic development; and, second, the contention that market-based provision of credit, savings, insurance and payment services by profit-driven agents is desirable over provision by state or mandate-driven firms such as postal or cooperative banks.
A recent study by dos Santos and Harvold Kvangraven (2017) has drawn on an extensive review of empirical and theoretical work to offer a critical assessment of these propositions and of broader policy calls for the expansion of EPSs to expand financial services to poor households. Considering the potential impacts of different financial services separately, the study raises serious concerns about efforts to expand volumes of lending to poor households, communities and regions. It also points to the important reductions EPSs can make to the costs of managing, safeguarding and sending money, while underscoring the vital role of government interventions in ensuring quality EPSs are universally available at low cost. Those arguments are directly relevant to debates concerning graduation approaches and their relationship to financial inclusion initiatives and EPSs.
This article considers current proposals for using electronic payments systems to promote financial inclusion — that is, to widen the availability of financial and monetary services in developing countries. While such systems can generate significant savings in the operation of monetary systems, payment services markets are typically uncompetitive and require regulatory and broader state interventions to ensure those savings are widely distributed. The use of those systems to broaden the reach of for-profit lenders raises a number of concerns, as a growing literature has documented how microcredit initiatives in developing countries have resulted primarily in expansions in consumption credit to households, often under predatory terms. The authors advance two original arguments in this connection. First, the perverse results of many microcredit initiatives reflect the underdevelopment of the areas concerned: without broader development strategies, potentially transformative productive projects are rare and unprofitable to finance. In contrast, widespread unmet consumption needs ensure consumption credit offers lenders a profitable alternative business orientation. Second, and in light of this, electronic payments platforms can contribute to economic development by enabling the establishment of well-regulated or public systems of electronic ‘narrow banks’ restricted from lending, but capable of widening access to affordable payments, savings and insurance services.
This monograph was created as a part of the project titled “Electronic means of payment without the issuer” financed by the Polish National Science Centre (NSC), based on the decision No DEC-2013/09/B/HS5/00019. The premise of awarding of funds by NCN was to promote interdisciplinarity, hence the research covered three
domains: computer science, economics and law. This division was reflected in the monograph, where each chapter is dedicated to a separate aspect of the functioning of cryptocurrencies, which, so far, are the only example of existing electronic means of payment without the issuer. Thus, the methodology, according to which the monograph has been written is not uniform and varies depending on the research area. This heterogeneous methodology, having a significant impact on the differences in the grid of concepts used in each research area, poses the biggest difficulties in the interdisciplinary studies. On one hand, it renders the harmonious cooperation in various disciplines impossible, as the same phenomenon (cryptocurrency in this case) appears to be quite different depending on the point of view resulting from the applied research method. On the other hand, it is impossible to imagine a proper, comprehensive analysis of such a phenomenon as cryptocurrency without the study of computer science, economics, and law. It is striking that so far there is no similar comprehensive monographic paper on cryptocurrencies in the world’s literature.
This is the first such a publication in the world.
The decision of credit unions in the United States to adopt transactional web-based services is consistent with profit-maximization behavior. Credit unions adopt transactional internet banking services when they provide a higher proportion of consumer loans and when there is increased competition from other financial institutions. They adopt transactional internet banking to attract new customers. The larger the credit union the higher the probability of adoption of transactional internet banking. The probability of adoption of transactional banking is directly related to credit unions’ efficiency and indirectly related to loan delinquencies. We also find that the probability of credit unions offering transactional internet banking is positively related to the percentage of the young population in the counties where credit unions are located.
A feature of electronic communication markets is that a consumer's decision to join or use a communications network can generate two effects on other users of the network: a network externality and a call externality. The former effect is defined as the benefit that users receive when a new subscriber joins the network (an expanded customer base can now be reached). The existence and magnitude of this effect is important from both theoretical and policy points of view. As a consequence, its empirical importance in various network markets has been documented in the literature. A call externality is defined as the benefit that a consumer derives when receiving a message (e.g. call) from another user, and it plays a crucial role both in the equilibrium predictions of theories of network competition and in the results of recent empirical work; however, as opposed to the network externality, no attempt has been made to quantify its empirical importance. In this paper I report results of a study designed to elicit and estimate the call externality. The data were generated using a stated-preference choice experiment designed to match theory and several characteristics of the mobile industry in Ecuador. To enhance the external validity of the results, the choice experiment was administered to over 2,500 individuals using 492 different internet-equipped government-run locations throughout the country. I find that call externalities are quite important in this market, but that their intensity depends heavily on the type of call (on-net v. off-net) as well as on the type of user (pre-paid v. post-paid). The call externality parameter for on-net calls is estimated at 0.67, while the significance of the call externality for off-net calls is significantly smaller (economically and statistically). Further, I find that the existence of call externalities in the market are mostly driven by pre-paid users.
User appropriation can be immensely helpful to bootstrap emerging technologies; but how do new and lesser known technologies attract these earliest adopters? This paper investigates user appropriation of emerging computing technologies, by focusing on Bitcoin, a digital monetary system supported by a peer-to-peer network of computing devices. We conducted in-depth interviews with sixteen Bitcoin community participants in Hong Kong, Singapore, and Baltimore. We describe user appropriation in this case of Bitcoin as a sociocultural journey-from encounter, research and learning, to socialization. We contribute the concept of cultural affinities, including conceptual, contextual and social dimensions, as important mediators leading to early-stage user appropriation.
This study uses a database of small businesses that participated in the US Department of Commerce's Advanced Technology Program (ATP) to observe the role of research alliances in undertaking high-risk technology research and development. The initial hypothesis is that small businesses benefit from membership in research alliances. This study examines two forms of research alliances: single applicants with subcontractor(s) and membership in a joint venture. The basis for the analysis includes data collected during the term of the project. Using data collected at project end provides a limited view of success as commercial achievements may come much later, and small businesses may derive advantages from participating in alliances not captured in the variables used. In light of this, the findings point to successful participation in ATP for small businesses as being dependent upon the type of organizational structure chosen as well as the role played by the small business in the research alliance. For example, assuming the role of the joint venture lead contributed to more successful technical and business outcomes.
This paper examines the significance of innovations in the area of payment services for strategies implemented by commercial banks in Poland. We propose a definition of payment innovations and present the evolution of their introduction in the Polish market, indicating the impact of legal regulations and the critical character of the new FinTech phenomenon. The analysis that we conducted was based on the results of a survey which obtained responses from 24 commercial banks representing almost the entire Polish retail banking sector based on the number of personal accounts maintained. The study helped to determine the main elements of the strategies implemented by banks in Poland. It also revealed the methods for competing in the area of payment services utilized by the banks, with innovative services as one Article details: of the leading elements. The results of the study indicated that there was a significant differentiation of applied strategies depending on a bank's size. In the case of larger banks, the main motivation for introducing payment innovations was characteristic of an offensive strategy, and for smaller banks — more often a defensive one. We also proposed a theoretical model for using the specific nature of payment innovations to build customer relationships and to apply cross-selling.
The aim of our work is to determine the involvement and plans of banks concerning the introduction of payment innovations in the Polish market. This empirical study was based on the results of two surveys. The first survey allowed us to obtain the official positions of 24 commercial banks. The second survey included the opinions of 70 experts, who were senior managers from banks and other payment market institutions. The paper presents the scope of the implementation of payment innovations and five-year plans outlined by the banks. It proved that commercial banks, including both the largest ones and those with a smaller market share, are extremely interested in payment innovations and are ready to implement many solutions at the same time. This new phenomenon can be described as the “universal innovativeness” of banks. Most of these innovations are intended to improve customer convenience, which helps banks to achieve an important strategic objective. Poland had recent changes in legal regulations which considerably reduced the interchange fee in card schemes. Our results indicated that, in spite of the decrease of the banks’ revenue, the innovation process did not slow down. A new situation is coopetition between banks in Poland, used as a successful model to implement the domestic mobile payment system BLIK. The Polish market of payment services has recently become one of the most innovative in the world. The diversification of innovations implemented by the banks may be read as a strategic response of those institutions to the dynamic technological advancements of FinTech and the related uncertainty of future trends in the payment market. The results have allowed us to formulate a hypothesis that is a new paradigm of a portfolio approach to introducing payment innovations that have appeared in banking.
Online users usually observe or refer to others’ behaviors and discount their own information when purchasing products online. This research employed a fixed-effect regression model to elucidate how information cascades could influence online purchase behaviors and how they moderated the influence of online word-of-mouth and product prices. To uncover the underlying mechanisms behind informational cascades, we compare search products and experience products. In particular, we utilize publicly available data from a B2C e-commerce site in China, i.e., Tmall.com. Our results indicate that online users’ choice of products was heavily driven by changes in product rankings after controlling for cumulative sales, online user reviews and product price, as predicted by informational cascades theory. Due to the information cascades effect, review volume had no impact on online users’ choice of products with high rankings, whereas it did exert a significant positive impact on consumer purchase decisions of products with low rankings. User rating had no impact on online users’ purchase decisions. Product price had a significant and negative impact for products with high rankings, but had a significant and positive influence on users’ choice for products with low rankings. Moreover, information cascades were more prominent for experience goods than for search goods.
The article presents the potential economic and social effects of allowing surcharging for card payments. The ban of no-surcharge rule is included in the Payment Services Directive, however, member states can decide on implementation of national option to limit these regulations. The performed analysis indicated that applying of surcharging by merchants in some countries caused negative effects on the development of payment card market. The main reason of this situation is high price sensitiveness of individuals to the price of payment services, which results in reduction of card usage. Therefore it seems that implementation of the ban of no-surcharge rule in Poland would result in a significant barrier to development of cashless turnover.
Smartphones are "systems," that is, collections of (hardware and software) components that work well with one another. They can also be viewed as multi-sided platforms that connect two or more distinct types of customers (users, application developers, handset manufacturers, network operators, and advertisers) and are characterized by the existence of indirect network effects - an extra customer on one side generates benefits for customers on the other side. In this study we focus on one specific aspect of the growth dynamics of Apple's iPhone: the feedback effects between users and applications (or application developers). After briefly tracing the history of the iPhone, we construct time series of users and apps. We then carry out cointegration analysis and estimate dynamic OLS (DOLS) and vector error correction models (VECM). We find evidence of indirect network effects of a substantial magnitude.
In this paper we analyze the role of network effects and consumer heterogeneity in the adoption of mobile phones. We estimate the decision to adopt a mobile phone using panel survey data of South African households between the years 2008 and 2012, which includes interviews with all adult household members. We construct variables which approximate network effects on the household level and find that the greater the number of mobile phones in the household, the greater the likelihood that the other household members will also adopt a mobile phone. Moreover, network effects depend on who in the household adopts a mobile phone. Without within-household network effects the penetration of mobile phones of 76.4% in 2012 would be lower by about 9.9 percentage points. The decision to adopt a mobile phone is also explained by observed and unobserved consumer heterogeneity.
The aim of the paper is to present the development of major payment innovations, which can be successfully used in Point-Of-Sale transactions. Due to the high technical and organizational requirements, the segment of transactions in the POS is the most difficult area for the development of payment innovations. At the same time the dominant role of consumer purchases in POS makes them the most important challenge for the devel- opment of cashless transactions in Poland. Empirical studies have shown that the contactless technology is the most effective in terms of speed of payment transaction at the cash desk. The contactless technology brings an important breakthrough because for the first time in the history of elec- tronic payments instrument, issued on a large scale, has proved to be more time-efficient than cash. Analysis of European trends in wide implementa- tion of contactless technology in the banking sector suggests the leading role of this innovation in the coming years. The paper presents an analysis of the process of implementation and dissemination of contactless payments on the Polish market. It is an important example of the success of the banking sector with the launch of a payment innovation. It was based on the results of a series of empirical studies, including: a survey of Polish and European banking sector, the survey of consumer behavior and the chronometrical study of time efficiency of POS payments.
Diese Dissertation besteht aus drei Aufsätzen, in denen verschiedene Aspekte von zweiseitigen Märkten untersucht werden. Dabei handelt es sich um Märkte mit zwei verschiedenen Nutzergruppen, von denen jede Netzwerkeffekte auf die jeweils andere Seite ausübt. Im ersten Aufsatz werden die Wechselwirkungen zwischen den traditionellen (offline) Nachfragekanälen und den neuen (online) Nachfragekanälen in der deutschen Zeitschriftenindustrie analysiert. Dabei liegt der Fokus insbesondere auf den Effekten zwischen Offlinewerbung und Onlinewerbung. Das Ergebnis der Schätzung eines dafür entwickelten ökonomischen Modells ist, dass Offline- und Onlinewerbung moderate Substitute füreinander sind. Dies erklärt die Verlagerung von Offline- zu Onlinewerbung, die man in den vergangen Jahren beobachten konnte. Im zweiten Aufsatz wird ein semistruktureller Ansatz zur Messung von Netzwerk-Effekten auf potentiell zweiseitigen Monopol-Plattformen entwickelt. Der Test ist hinreichend, wenn lediglich Daten zum Gesamtumsatz der Plattform zur Verfügung stehen. Sind getrennte Umsatzdaten für die beiden Seiten verfügbar, dann ist der Test sowohl notwendig als auch hinreichend. Der dritte Aufsatz untersucht Mechanismen und Anreize, die die Koordination von Angebot und Nachfrage auf Kreditmärkten ermöglichen, in denen es keine Finanzintermediäre mit eigener finanzieller Beteiligung an den vergebenen Darlehen gibt. Dazu wird der Online-Direktkreditmarkt analysiert, in welchem an die Stelle von klassischen Finanzintermediären ein System von Gruppen tritt. Anhand eines Differenz-in-Differenzen-Ansatzes wird gezeigt, dass Entgelte für die Leiter dieser Gruppen zu adversen Anreizen führen können. Nach Abschaffung der Entgelte differenzieren die Leiter der Gruppen deutlich stärker bei der Auswahl derjenigen Kreditgesuche, die sie als investitionswürdig empfehlen. Gleiches ist zu beobachten, wenn die Leiter der Gruppen selbst zu einem großen Teil an den entsprechenden Darlehen beteiligt sind.
Although various authors have postulated the benefits of Electronic Bill Presentment and Payment (EBPP), penetration of electronic invoicing is in practice still low. The following article investigates the status of European EBPP implementations in B2B relationships. Based on an empirical survey of 27 companies, it provides a state-of-the-art analysis of EBPP implementations in an industrial environment. As with other e-business scenarios, network externalities can serve as an explanation of the relatively low dissemination of EBPP. The article discusses the key decisions related to EBPP which determine network externalities: the choice of the EBPP model, the electronic channel and the invoice formats. Based on the survey results, it derives three stages of EBPP implementation characterised by specific EBPP models, channels and formats. As a conclusion, the existence of hub-to-hub connections between EBPP consolidators is regarded as a major success factor for the future penetration of EBPP.
This paper proposes an empirical framework for measuring the effects of entry in concentrated markets. Building on models of entry in atomistically competitive markets, the authors show how the number of producers in an oligopolistic market varies with changes in demand and market competition. These analytical results structure the authors' empirical analysis of competition in five retail and professional industries. Using data on geographically isolated monopolies, duopolies, and oligopolies, they study the relationship between the number of firms in a market, market size, and competition. The authors' empirical results suggest that competitive conduct changes quickly as the number of incumbents increases. Copyright 1991 by University of Chicago Press.
In this paper we examine the importance of local spillovers--such as network externalities and learning from others--in the diffusion of home computers. We use data on 110,000 U.S. households in 1997. Controlling for many individual characteristics, we find that people are more likely to buy their first home computer in areas where a high fraction of households already own computers or when a large share of their friends and family own computers. Further results suggest that these patterns are unlikely to be explained by common unobserved traits or by area features. When looked at in more detail, the spillovers appear to come from experienced and intensive computer users. They are not associated with the use of any particular type of software but do seem to be highly tied to the use of e-mail and the Internet, consistent with computers being part of an information or communication network. Copyright 2002 by the University of Chicago.
There are often benefits to consumers and to firms from standardization of a product. We examine whether these standardization benefits can "trap" an industry in an obsolete or inferior standard when there is a better alternative available. With complete information and identical preferences among firms the answer is no; but when information is incomplete this "excess inertia" can occur. We also discuss the extent to which the problem can be overcome by communication.
Incompatibility in markets with indirect network e�ects can a�ect prices if consumers value ?mix and match?combinations of complementary network components. In this paper, we exam- ine the e�ects of incompatibility using data from a classic market with indirect network e�ects: Automated Teller Machines (ATMs). Our sample covers a period during which higher ATM fees increased incompatibility between ATM cards (which are bundled with deposit accounts) and other banks?ATM machines. A series of hedonic regressions suggests that incompatibility strengthens the relationship between deposit account pricing and own ATMs, and weakens the relationship between deposit account pricing and competitors?ATMs. The e�ects of incom- patibility are stronger in areas with high population density, suggesting that high travel costs increase both the strength of network e�ects and the importance of incompatibility in ATM markets.
In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system which stem not from high prices but from the fact that the complementary product is not available. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD prices and (the cross) elasticity with respect to the variety of CD-titles. Our results show that the cross elasticity is indeed significant so that the presence of complementarities poses a serious bottleneck problem for the diffusion of the base product. We illustrate two applications of our methodology: (i) the business-policy question of how to subsidize a new base product which is contingent on a sufficiently large supply of complementary products & (ii) the public-policy question of what are the benefits of imposing backward compatibility on a new technology (e.g., high definition televisions).
We analyze the equilibrium size of networks under alternative market structures. Networks are characterized by positive size externalities (commonly called "network externalities"). That is, the benefits of the addition of an extra node (or an extra customer) exceed the private benefits accruing to the particular node (or customer). A direct consequence of this demand structure is that perfect competition does not implement the optimal outcome. Because of the externality, there exists a range of prices within which three different network sizes can be supported as equilibria: a zero size network, an intermediate size that is unstable, and a large stable and Pareto optimal one. We expect that the market will select the largest of the three equilibrium networks. As a result, small networks will not observed. We call critical mass the size of the smallest network that can be supported in equilibrium. Alternative allocation systems internalize the network externality to different degrees, and therefore result in a variety of sizes of critical masses and price-network size paths. A welfare-maximizing planner supports a larger network than results in perfect competition. Surprisingly, a monopolist, even if allowed to influence consumers' expectations, always chooses a network of smaller size than in perfect competition. Oligopolists of compatible network goods support networks of smaller size than perfect competition and larger than monopoly. We extend our results to durable goods in a dynamic setting. In the presence of a downward time trend for industry marginal cost, the presence of network externalities increases the speed at which market demand grows. We use this prediction to calibrate the model and obtain estimates of the parameter measuring a consumer's valuation of the installed base (i.e., the network effect) using aggregate time series data on prices and quantities in the US fax market.
We analyze technology adoption in industries where network externalities are significant. The pattern of adoption depends on whether technologies are sponsored. A sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it. Key findings include the following: (1) compatibility tends to be undersupplied by the market, but excessive standardization can occur; (2) in the absence of sponsors, the technology superior today has a strategic advantage and is likely to dominate the market; (3) when one of two rival technologies is sponsored, that technology has a strategic advantage and may be adopted even if it is inferior; (4) when two competing technologies both are sponsored, the technology that will be superior tomorrow has a strategic advantage.
We develop a dynamic structural model of consumers' choices and producers' pricing in an oligopolistic market for newly introduced durable products with network externalities. The model is then applied to empirically analyze the de facto standardization of the VHS format in the U.S. home VCR market during 1981-1988. We find: (i) the network advantage of VHS explains at least 70.3% to 86.8% of (the logarithm of) relative sales of VHS to Betamax in each year; (ii) an increase in the network advantage of VHS was an engine of tipping toward the VHS format; and (iii) in the early 1980s, the network advantage of VHS was mainly due to its expected growth advantage. Copyright (c) 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
We seek to determine the causes and magnitudes of network externalities for the automated clearing house (ACH) electronic payments system.We construct an equilibrium model of customer and bank adoption of ACH.We structurally estimate the parameters of the model using an indirect inference procedure and panel data. The parameters are identified from exogenous variation in the adoption decisions of banks based outside the network and other factors. We find that most of the impediment to ACH adoption is from large customer fixed costs of adoption. Policies to provide moderate subsidies to customers and larger subsidies to banks for ACH adoption could increase welfare significantly. Ordering information: This article can be ordered from http://gemini.econ.umd.edu/cgi-bin/rje_online.cgi?action=buy&year=2006&issue=aut&page=738&tid=30492&sc=1869P1N9 .
We examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware-adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system. We consider the CD industry and estimate the (direct) elasticity of adoption with respect to CD player prices and the (cross) elasticity with respect to the variety of CD titles. Our results show that the cross elasticity is significant. Our model can be used to quantify the effect of various policies aimed at speeding up the diffusion of a system.
In this article, I first estimate hedonic price equations for computer spreadsheet programs, and then use the analysis to empirically test whether network externalities exist in this industry. The study shows that consumers are willing to pay a significant premium for spreadsheets that are compatible with the Lotus platform and for spreadsheets that offer links to external databases, and a similar premium for spreadsheets that offer local area network externalities. Finally, the quality-adjusted (real) price of computer spreadsheets declined by approximately 15% per year from 1986 to 1991.
This research examines the relative strength and significance of the status of "incumbent contractor" in federal computer procurement. One finding, as expected, is that an agency is likely to acquire a system from an incumbent vendor. Another finding, perhaps more interesting, is that the (in)compatibility between a buyer's installed base and a potential system also influences the vendor choice; a result that may be the first econometric measurement of the competitive effects of incompatibility. An illustration of this thesis comes from IBM's experience. New evidence shows, however, that IBM's apparent disadvantage with government agencies is largely due to incompatibilities in IBM's product line.
The literature on networks suggests that the value of a network is positively affected by the number of geographically dispersed locations it serves (the "network effect") and the number of its users (the "production scale effect"). We show that as a result a firm's expected time until adoption of technologies with network effects declines in both users and locations. We provide empirical evidence on the adoption of automated teller machines by banks that is consistent with this prediction. Using standard duration models, we find that a bank's date of adoption is decreasing in the number of its branches (a proxy for the number of locations and hence for the network effect) and the value of its deposits (a proxy for number of users and hence for production scale economies). The network effect is the larger of the two effects.
This paper presents a theory of government intervention which provides an explanation for "industrial strategy" policies such as R&D or export subsidies in imperfectly competitive international markets. Each producing country has an incentive to try to capture a greater share of rent-earning industries using subsidies, but the subsidy-ridden international equilibrium is jointly suboptimal. The equilibrium in the strategic game involving firms and governments is modelled as a three stage subgame perfect Nash equilibrium. The assumption that the government is the first player in this game allows it to influence equilibrium industry outcomes by altering the set of credible actions open to firms.
A significant part of payment system activity is and historically has been conducted through private, multilateral arrangements among banks. Such arrangements arise in response to the network characteristics of payment systems. Network characteristics, some observers believe, are a source of market failure that prevents private initiatives from achieving economic efficiency. This conclusion derives from a theoretical approach that takes the organization of private arrangements as given. A theory that instead seeks to explain how private arrangements emerge in network markets has very different implications.
This paper examines the reflection problem that arises when a researcher observing the distribution of behaviour in a population
tries to infer whether the average behaviour in some group influences the behaviour of the individuals that comprise the group.
It is found that inference is not possible unless the researcher has prior information specifying the compisition of reference
groups. If this information is available, the prospects for inference depend critically on the population relationship between
the variables defining reference groups and those directly affecting outcomes. Inference is difficult to implossible if these
variables are functionally dependent or are statistically independent. The prospects are better if the variables defining
reference groups and those directly affecting outcomes are moderately related in the population.
This paper estimates the importance of network effects in the market for Yellow Pages. I estimate three simultaneous equations:
consumer demand for usage of a directory, advertiser demand for advertising and a publisher's first-order condition (derived
from profit-maximizing behaviour). Estimation shows that advertisers value consumer usage and that consumers value advertising,
implying a network effect. I find that internalizing network effects would significantly increase surplus. As an application,
I consider whether the market benefits from monopoly (which takes advantage of network effects) or oligopoly (which reduces
market power). I find that a more competitive market is preferable.
This paper presents a theory of government intervention which provides an explanation for “industrial strategy” policies such
as R & D or export subsidies in imperfectly competitive international markets. Domestic net welfare is improved by the capture
of a greater share of the output of rent earning industries, although the subsidy-ridden noncooperative international equilibrium
is jointly suboptimal. Behaviour of governments and firms is modelled as a three stage subgame perfect Nash equilibrium. The
assumption that the government is the first player in this game allows it to influence equilibrium outcomes by altering the
set of credible actions open to firms.
In data with a group structure, incidental parameters are included to control for missing variables. Applications include longitudinal data and sibling data. In general, the joint maximum likelihood estimator of the structural parameters is not consistent as the number of groups increases, with a fixed number of observations per group. Instead a conditional likelihood function is maximized, conditional on sufficient statistics for the incidental parameters. In the logit case, a standard conditional logit program can be used. Another solution is a random effects model, in which the distribution of the incidental parameters may depend upon the exogenous variables.
This article explores the potential impact of fraud on new forms of retail payment such as electronic cash and stored-value cards. These new payments media can increase economic efficiency by incorporating advances in computer technology into payments systems. Payments systems based on these new media communicate much of the same information as traditional payments systems but at a potentially lower cost. Electronic payments systems have this advantage because it is cheaper to move electrons than it is to move paper. This natural advantage of electronic systems can be a disadvantage, however, when it comes to the risk of fraud. Since computer data are readily stored, copied, and manipulated, complex security procedures are needed to guarantee the integrity of electronic payments data.
Quantitative Analysis of Network Effects in Competing Technologies: the VCR Case,” mimeo, SUNY at Stony Brook. r32 RoberdsThe Impact of Fraud on New Methods of Retail Payment
- Park
- Sangin
Park, Sangin (1997). “Quantitative Analysis of Network Effects in Competing Technologies: the VCR Case,” mimeo, SUNY at Stony Brook. r32 Roberds, William (1998). “The Impact of Fraud on New Methods of Retail Payment,” Federal Reserve Bank of Atlanta Economic Review: 42-52
The Impact of Fraud on New Methods of Retail Payment Federal Reserve Bank of Atlanta Economic Review
- William Roberds
Roberds, William (1998). " The Impact of Fraud on New Methods of Retail Payment, " Federal
Reserve Bank of Atlanta Economic Review: 42-52.