Network Externalities and Compatibility Among Standards: A Replicator Dynamics and Simulation Analysis

Abstract

The importance of network externalities for the development of technology and industry structure has been recognized in evolutionary economic for a long time. However, network externalities are no isolated phenomena. They are based on competing standards in a comprehensive network of technology lines that are based on one another and remain to various degrees interoperable or compatible. As some evidence from the ICT sector inparticular shows, compatibility and tying or bundling of standards may be employed as strategic tools. The present paper investigates the economic role of tied standards for the dynamics of competition between standards. A replicator model operating on an aggregated level is complemented by an agentbased simulation with explicit representation of the network structure among users. A variety of effects are studied, including the role of initial usage share, manipulation of compatibility, expansion of vendors into other segments, as well as the network structure and central or peripheral positioning of agents. The agent-based model contrasts a complete network and a regular ring network with asymmetric network structures derived from Barabàsi and Albert's preferential attachment mechanism and triadic closure.

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