Interactive, Option-Value and Domino Network Effects in Technology Adoption

Networks, the Internet, and Cloud Computing

Article Snapshot

Author(s)

Catherine Tucker

Source

Working Paper, 2006

Summary

This paper studies how and why consumers join networks.

Policy Relevance

Some scholars argue that networks need special regulatory treatment. Data show that users value networks used only by those they actually wish to interact with. Competition laws or subsidy policies that assume users automatically get the most benefit from (or most value from) the biggest network may be mistaken.

Main Points

  • “Network effects” mean that a network becomes more valuable to a user when there are more other users. One fax machine is not useful, because no one can send to or receive from it, but as more machines are added to its network the first machine becomes more useful.

 

  • Many scholars assume that user benefits from networks automatically increase as the total number of users increases. But most users interact with only a small number of other users. If users value networks with more total members anyway, this might be because:
    • Even if each users does not interact with many others, they value the option to do so (an “option-value network effect”).
    • Or users anticipate that the few others they want to interact with are more likely to join a network with more members (a “domino network effect”).
 
  • How much users value participation by those they do not interact with is an empirical question. Data from adopters of a firm’s internal messaging system show that potential users only react to network adoption by people they actually wish to interact with. Neither reason above is a factor in adoption.

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