Systems Competition and Network Effects

Abstract

M any products have little or no value in isolation, but generate value when combined with others. Examples include: nuts and bolts, which together provide fastening services; home audio or video components and programming, which together provide entertainment services; automobiles, repair parts and service, which together provide transportation services; facsimile machines and their associated communications protocols, which together provide fax services; automatic teller machines and ATM cards, which together provide transaction services; camera bodies and lenses, which together provide photographic services. These are all examples of products that are strongly complementary, although they need not be consumed in fixed proportions. We describe them as forming systems, which refers to collections of two or more components together with an interface that allows the components to work together. This paper and the others in this symposium explore the economics of such systems. Market competition between systems, as opposed to market competition between individual products, highlights at least three important issues: expectations, coordination, and compatibility. A recent wave of research has focused on the behavior and performance of the variety of private and public institutions that arise in systems markets to influence expectations, facilitate coordination, and achieve compatibility.In many cases, the components purchased for a single system are spread over time, which means that rational buyers must form expectations about

Rational incompatibility with international product standards

“…Meanwhile, trade treaties (e.g., NAFTA) increasingly incorporate language designed to restrict nations' abilities to introduce technical barriers to trade (Sykes 1995, Wilson 1995 The literature on networks explains incompatibility as arising either from consumer heterogeneity that gives social value to variety, from stochastic technology quality that creates disincentives to betting everything on one standard of uncertain ultimate quality, or from firm asymmetries that'cause one firm to be confident it will win a contest of competing standards , Katz and Shapiro 1986, Matutes and Regibeau 1988, Katz and Shapiro 1994.…”

Business ecosystem research agenda: more dynamic, more embedded, and more internationalized

“…That is, the value of a product/service increases in line with the number of people that use it. This indicates a two-sided market to explain the network effect in platform-based business competition: the focal firm will earn more benefits if its platform is home to more users, from both supply and demand sides (Katz and Shapiro 1994;Parker and Van Alstyne 2005;Tirole 2003, 2006;Shankar and Bayus 2003). For instance, in the ICT (Information Communications Technology) industry the more complementors join the ecosystem to supply complementarities, the more valuable the platform becomes to consumers due to a greater variety of choice (Scholten and Scholten 2012).…”

Cooperation and Competition in Markets with Network Externalities or Learning Curves

“…in equilibrium the actual size of the network equals the size that consumers (rationally) expected (the seminal paper on this approach is Katz/Shapiro, 1985 ). However, Matutes/Regibeau (1996) point out that there are also studies were rms can commit to a certain quantity ( commitment approach ), and others where consumers base their valuation on the current network size ( myopic approach see e. g. Regibeau/Rockett, 1996 ).…”

“…A related phenomenon of dynamic competition are network externalities (for an overview see Shy, 2011 or Katz/Shapiro, 1994 ). In a market with network externalities the utility of a consumer depends on the number of consumers who buy the same or a compatible good.…”