nep-net New Economics Papers
on Network Economics
Issue of 2008‒05‒31
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Bertrand Competition in Markets with Network Effects and Switching Costs By Irina Suleymanova; Christian Wey
  2. On the (Mis-) Alignment of Consumer and Social Welfare in Markets with Network Effects By Irina Suleymanova; Christian Wey
  3. The Effect of Superstar Software on Hardware Sales in System Markets By Binken, J.L.G.; Stremersch, S.
  4. Competing Industrial Standards and the Impact of Trade Liberalization By Kikuchi, Toru; Iwasa, Kazumichi
  5. The impact of network structure on knowledge transfer: An application of social network analysis in the context of regional innovation networks By Michael Fritsch; Martina Kauffeld-Monz
  6. Interaction Structures in Local Innovation Systems By Uwe Cantner; Holger Graf
  7. Is Regional Science a Scientific Discipline? Answers from a Citation Based Social Network Analysis By Gunther Maier; Alexander Kaufmann; Michael Vyborny

  1. By: Irina Suleymanova; Christian Wey
    Abstract: We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.
    Keywords: Network effects, switching costs, Bertrand competition, market dynamics
    JEL: L13 D43 L41
    Date: 2008
  2. By: Irina Suleymanova; Christian Wey
    Abstract: We analyze duopoly Bertrand competition under network effects. We consider both incompatible and compatible products. Our main result is that network effects create a fundamental conflict between the maximization of social welfare and consumer surplus whenever products are incompatible. While consumer surplus is highest in the symmetric equilibrium, social welfare is highest in the asymmetric equilibrium. We also show that both consumer surplus and social welfare are higher in any equilibrium under compatibility when compared with incompatible products. However, .firms never have strict incentives to achieve compatibility. Finally, we show the robustness of our results when products are horizontally differentiated.
    Keywords: Bertrand duopoly, network effects, (In-) compatibility, welfare
    JEL: D43 L13
    Date: 2008
  3. By: Binken, J.L.G.; Stremersch, S. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Systems are composed of complementary products (e.g., video game systems are composed of the video game console and video games). Prior literature on indirect network effects argues that, in system markets, sales of the primary product (often referred to as “hardwareâ€) largely depend on the availability of complementary products (often referred to as “softwareâ€). Mathematical and empirical analyses have almost exclusively operationalized software availability as software quantity. However, while not substantiated with empirical evidence, case illustrations show that certain “superstar†software titles of very high quality (e.g., Super Mario 64) may have had disproportionately large effects on hardware unit sales (e.g., Nintendo N64 console sales). In the context of the U.S. home video game console market, we show that the introduction of a superstar increases video game console sales on average by 14%, over a period of 5 months. Software type does not consistently alter this effect. Our findings imply that scholars who study the relationship between software availability and hardware sales, need to account for superstar returns, and their decaying effect over time, over and above a mere software quantity effect. Hardware firms should maintain a steady flow of superstar introductions, as the positive effect of a superstar only lasts for 5 months, and make, if need be, side-payments to software firms, as superstars dramatically increase hardware sales. Obtaining exclusivity over superstars, by hardware firms, does not provide an extra boost to their own sales, but it does take away an opportunity for competing systems to increase their sales.
    Keywords: system markets;superstars;indirect network effects;new product introductions;software;hardware;video game industry
    Date: 2008–05–15
  4. By: Kikuchi, Toru; Iwasa, Kazumichi
    Abstract: The main purpose of this study is to illustrate, with simple trade theory, the relationship between competing industrial standards and trade liberalization. We assume that there are two competing industrial standards in an international context, each of which consists of differentiated products. A product can be used only in combination with other products based on the same industrial standard. We examine the impact of trade liberalization (i.e., a decline in trade costs) on consumers' choice of a standard. It will be shown that the degree of indirect network effects, captured with substitution between differentiated products, plays an important role as a determinant of the impact of trade liberalization.
    JEL: F12
    Date: 2008
  5. By: Michael Fritsch (Friedrich Schiller University Jena, German Institute for Economic Research (DIW-Berlin), and Max Planck Institute of Economics, Jena, Germany); Martina Kauffeld-Monz (Institute for Urban Science and Structural Policy (IfS Berlin), Germany)
    Abstract: We analyze information and knowledge transfer in a sample of 16 German regional innovation networks with almost 300 firms and research organizations involved. The results indicate that strong ties are more beneficial for the exchange of knowledge and information than weak ties. Moreover, our results suggest that broker positions tend to be associated with social returns rather than with private benefits.
    Keywords: Regional innovation networks, R+D-collaboration, knowledge exchange, social network analysis, strong ties, knowledge brokers
    JEL: D83 D85 L14 O32
    Date: 2008–05–06
  6. By: Uwe Cantner (Friedrich-Schiller University, Jena, Economics Department); Holger Graf (Friedrich-Schiller University, Jena, Economics Department)
    Abstract: The flow of knowledge through interaction between innovative actors is central to the systemic view of innovation. We review the lite ature on interaction and innovator networks with a focus on regional aspects. To illustrate the relevance of these relations, we apply social network analysis methods to describe the evolution of the innovator network of Jena, Germany in the period from 1995 to 2001. During this period, the network is characterised by growth in the number of patents, actors and relations, with central positions of public research. The evolution is directed towards an increasing focus on core compe- tencies of the network.
    Keywords: Innovator Networks, Innovation System, R+D Cooperation. Mobility
    JEL: O31 L14 R11
    Date: 2008–05–08
  7. By: Gunther Maier; Alexander Kaufmann; Michael Vyborny
    Date: 2008

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