nep-net New Economics Papers
on Network Economics
Issue of 2007‒11‒10
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Standards Competition In The Presence Of Digital Conversion Technology: An Empirical Analysis Of The Flash Memory Card Market By Charles Z. Liu; Chris F. Kemerer; Michael D. Smith
  2. Online Peer-to-peer Communities: An Empirical Investigation of a Music Sharing Network as a Dynamic Two-sided Network By Bin Gu; Yun Huang; Wenjing Duan; Andrew B. Whinston
  3. The Control of Porting in Two-Sided Markets By Pollock, R.
  4. Social Reinforcement: Cascades, Entrapment and Tipping By Geoffrey Heal; Howard Kunreuther
  5. Privacy Protection and Technology Diffusion: The Case of Electronic Medical Records By Catherine Tucker; Amalia Miller
  6. On the dynamics of knowledge generation and trust building in regional innovation networks. A multi method approach By Maria Daskalakis; Martina Kauffeld-Monz

  1. By: Charles Z. Liu (Katz Graduate School of Business, University of Pittsburgh); Chris F. Kemerer (Katz Graduate School of Business, University of Pittsburgh); Michael D. Smith (Heinz School of Public Policy and Management, Carnegie Mellon University)
    Abstract: Both theoretical and empirical evidence suggest that in markets with standards competition, strong network effects can make the strong grow stronger and, in some circumstances, even “tip” the market towards a single, winner-take-all standard. We theorize that in the presence of low cost conversion technologies and digital content, the tendency towards market dominance can be lessened to the point where multiple incompatible standards are viable. Our hypotheses are empirically examined in the context of the flash memory card market where both network effects and high quality conversion are present. The results show that the availability of digital converters reduces the price premium of the leading flash card formats more than of the minority formats. Therefore, producers of the non-dominant standards can be better off with the provision of conversion technology as this technology neutralizes the impact of network effects that would have otherwise been more potent. We discuss both the social and private implications of our findings.
    Keywords: network effects, standards competition, conversion technologies, flash memory, digital goods
    JEL: C12 C23 D62 L11 L15
    Date: 2007–09
  2. By: Bin Gu (McCombs School of Business, University of Texas at Austin); Yun Huang (McCormick School of Engineering and Applied Science, Northwestern University); Wenjing Duan (George Washington University); Andrew B. Whinston (McCombs School of Business, University of Texas at Austin)
    Abstract: Online peer-to-peer communities and online social networks have become increasingly popular. In particular, the recent boost of online peer-to-peer communities leads to exponential growth in sharing of user-contributed content which have brought profound changes to business and economic practices. Understanding the formation and sustainability of such peer-to-peer communities has important implications for businesses. We develop a dynamic two-sided network model that relates growth of communities to interactions between contribution and consumption of resources in online sharing activities. Using online music sharing data collected from a popular IRC music sharing service over five years, we empirically apply the model to identify dynamics in the music sharing community. We find that the music sharing community demonstrates distinctive characteristics of a two-sided network. Contribution in the community leads to more consumption and consumption leads to more contribution, creating positive network effects in the community. Moreover, we find significant negative externalities among consumption activities and among contribution activities. The combination of the positive and negative externalities drives the underlying dynamics and growth of online sharing communities. Using the dynamic model, we quantify equilibrium growth rate of the community. We find that the equilibrium growth rate changes over time, possibly as a result of legal actions taken by the music industry. Our study provides a first glimpse into the mechanism through which peer-to-peer communities sustain and thrive in a constantly changing environment.
    Keywords: online communities, two-sided networks, IRC channel, peer-to-peer network, evolutionary games, digital piracy
    JEL: L14 C73 O34
    Date: 2007–10
  3. By: Pollock, R.
    Abstract: A sizable literature has grown up in recent years focusing on two-sided markets in which economies of scale combined with complementarities between a platform and its associated ‘software’ or ‘services’ can generate indirect network effects (that is positive feedback between the number of consumers using that platform and the utility of an individual consumer). In this paper we introduce a model of ‘porting’ in such markets where porting denotes the conversion of ‘software’ or ‘services’ developed for one platform to run on another. Focusing on the case where a dominant platform exists we investigate the impact on equilibrium and the consequences for welfare of the ability to control porting. Specifically, we show that the welfare costs associated with the ‘control of porting’ may be more significant than those arising from pricing alone. This model and its associated results are of particular relevance because of the light they shed on debates about the motivations and effects of actions by a dominant platform owner. Recent examples of such debates include those about Microsoft’s behaviour both in relation to its operating system and its media player, Apple’s behaviour in relation to its DRM and iTunes platform, and Ebay’s use of the cyber-trespass doctrine to prevent access to its site. Key words: Network Effects, Two-Sided Markets, Porting, Antitrust, Competition.
    JEL: L15 L12 L13
    Date: 2007–11
  4. By: Geoffrey Heal; Howard Kunreuther
    Abstract: There are many social situations in which the actions of different agents reinforce each other. These include network effects and the threshold models used by sociologists (Granovetter, Watts) as well as Leibenstein's "bandwagon effects." We model such situations as a game with increasing differences, and show that tipping of equilibria as discussed by Schelling, cascading and Dixit's results on clubs with entrapment are natural consequences of this mutual reinforcement. If there are several equilibria, one of which Pareto dominates, then we show that the inefficient equilibria can be tipped to the efficient one, a result of interest in the context of coordination problems.
    JEL: D20 D80 D85 Q59
    Date: 2007–11
  5. By: Catherine Tucker (MIT Sloan); Amalia Miller (Department of Economics, University of Virginia)
    Abstract: Some policymakers argue that consumers need legal protection of their privacy before they adopt interactive technologies. Others contend that privacy regulations impose costs that deter adoption. We contribute to this growing debate by quantifying the effect of state privacy regulation on the diffusion of Electronic Medical Record technology (EMR). EMR allows medical providers to store and exchange patient information using computers rather than paper records. Hospitals may not adopt EMR if patients feel their privacy is not safeguarded by regulation. Alternatively, privacy protection may inhibit adoption if hospitals cannot benefit from exchanging patient information with one another. In the US, medical privacy laws that restrict the ability of hospitals to disclose patient information vary across time and across states. We exploit this variation to explore how privacy laws affect whether hospitals adopt EMR. Our results suggest that inhibition of EMR's network benefits reduces hospital adoption by up to 25 percent. We find similar evidence when we control for the endogeneity of state laws using variation in signups to the Do Not Call list.
    Keywords: Technology adoption, privacy laws, network effects, hospitals
    JEL: I1 K2 L5 O3
    Date: 2007–09
  6. By: Maria Daskalakis (Department of Economics, University of Kassel); Martina Kauffeld-Monz (Department of Economics, University of Kassel)
    Abstract: Researchers in the field of innovation networks have acknowledged the important role knowledge and interaction play for the emergence of innovation. However, not much research has been done to investigate the behavioural dynamics necessary for the success of innovation networks. Our article deals with this issue in a threefold manner: we combine a theoretical analysis with an empirical validation and set up a multi-agent system based on both, simulating the behavioural dynamic of collaborative R&D. With regard to the theoretical foundation, the cognitive foundations of knowledge generation under bounded rationality are conceptualized. This is linked to a discussion about the role trust plays in the course of economic interaction. Trust itself proves to be a relevant mode of economic (inter)action which enables agents to overcome social dilemmas that might arise in the process of collaborative R&D. For empirical validation, a unique data set is used (23 German innovation networks, containing about 600 agents). Results of the analyses highlight the dynamics and interdependence of knowledge generation and trust as well as the sources of trust building in terms of three different components (generalised trust, specific trust, and institutional trust). The multi-agent system comprises the theoretical and empirical findings, e.g. in incorporating heterogeneity with regard to adaptive capacity, reciprocity and the tolerance of non-reciprocal behaviour. The results give evidence of the (changing) relevance of trust in the course of collaborative R&D. The success of collaborative R&D is determined through a co-evolution of individual and interactive processes of knowledge transformation und trust building.
    Keywords: Regional Innovation System, Innovation Networks, Behavioral Economics, Trust, Knowledge Transfer.
    Date: 2007–05

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