EFFECTS and MARKET ENGINEERING
I was introduced to network effects theory by Wolfgang Koenig at his keynote
to the BIT2001 conference: "Reconsidering Network Effect Theory - applied
on information technology and telecommunication markets".
Network effects is the term given to goods where the possession of product
A by one consumer affects the value of product B for some other consumer.
The classic example being telephone usage where the value to any individual
depends on their friends and colleagues also possessing telephones.
The literature focuses heavily on the way in which network effects break
the assumptions underlying classical economic theory and can lead to sub-optimal
equilibrium situations. For example, if everyone had a telegraph then
it may have been very hard for telephones to break into the market even
though they are a superior technology. The area has achieved some prominence
as it has been cited in the Microsoft ant-trust cases.
There have been various attempts to model network effects, but again
principally focused on trying to understand issues such as the emergence
of (possibly sub-optimal) monopolies.
In contrast, my analyses of market ecology, lattice of value and market
engineering are more orientated to understanding how to design and position
products to maximise network effects to allow rapid self growth. Also,
the main focus of my analysis has been in unsaturated market situations,
that is entry point rather than monopoly/oligopoly situations. This is
partly due to the context the analyses have developed - the strategic
design of products for small startup companies.
some of my own related material
lattice of value - principles for designing products that exhibit
self growth through network effects, focusing on web developers/users
and other producer/consumer markets
ecology and market engineering - using models of interconnected
internet markets to enable strategic design choices for product families
that will exhibit self-growth
network effects resource pages
2.0 articles on Network Effects. various archive articles
Liebowitz' page on Network Effects. School of Management, University
of Texas at Dallas
Economides' page on the Economics of Networks. Stern School of Business,
New York University
R. Varian's link site on Network Economics. School of Information
Management and Systems, University of California Berkeley
selected network effects articles
These are (unashamedly) from those I could read easily from online sources!
Liebowitz and Steve Margolis. "Network Externalities (Effects)" entry
in The New Palgraves Dictionary of Economics and the Law, MacMillan,
- short (5 page) overview/review article
Economides. The Economics of Networks. International Journal of Industrial
Organization. October 1996,
- longer and detailed review paper (37 pages including 6 pages of references).
I found the treatment a little confusing in places as the products being
discussed are almost entirely network products (telecoms, railroads),
whereas the terms network effect/network externalities are also used
in a broader sense of networks of contacts between potential customers.
E. and C.F. Kemerer, "Network Externalities in Microcomputer Software:
An Econometric Analysis of the Spreadsheet Market", Management Science,
42, (12), 1627-1647, December 1996
- this paper builds an empirical model of prices for spreadsheets as
an example of a good having strong network effects. At the time the
paper was written he predominant spreadsheet was Lotus 1-2-3 and prophetically
the paper notes that just as the change from CPM/Apple II to DOS allowed
the growth of Lotus at the expense of VisiCalc, the change to Windows
may open the way for Excel to win market share! the authors fit a multidimensional
model, but one interesting effect was that the use of Lotus compatible
menus was a stronger effect than actually being Lotus. That is despite
the predominant position the Lotus brand was less important than the
Lotus interface - perhaps a lesson for other IT and Internet products.
full paper in HTML
Tim;‹Wendt, Oliver;‹von Westarp, Falk. Reconsidering Network Effect
Theory. In: 8th European Conference on Information Systems (ECIS 2000);‹Wien,
- much is this paper is a recent review and critique of network effect
literature. The authors also use discrete event simulation to model
different kinds of networks - those based on geographical closeness,
which tend to be more cliquey, vs. those based on random interconnections,
more like the Internet. As expected network effects were more likely
to lead to runaway growth and monopoly in the randomly connected situation.
some CSCW literature on critical mass
J. (1988) Why CSCW applications fail: problems in the design and evaluation
of organisational interfaces. In: CSCWÃ88 Proceedings of the Conference
on Computer-Supported Cooperative Work, ACM SIGCHI & SIGOIS, pp. 85Á93
- In this paper Grudin introduced the critical mass effect (and other
design issues) into the CSCW vocabulary.
and full paper in ACM digital library
Cockburn , Harold Thimbleby, Reducing user effort in collaboration support,
Proceedings of the international workshop on Intelligent user interfaces,
p.215-218, January 04-07, 1993, Orlando, Florida, United States
- This and Andy's thesis work are the first example I know where a
deliberate attempt is made to design a CSCW product to avoid critical
mass effects. It is only recently that I have realised how much this
had influenced me in my CSCW and the Web analysis below.
and full paper in ACM digital library
Dix (1997). Challenges for Cooperative Work on the Web: An analytical
approach. Computer-Supported Cooperative Work: The Journal of Collaborative
Computing, 6 pp. 135-156.
- In this paper I applied critical mass thinking to web interfaces and
discuss the various ways a groupware design can avoid critical mass
problems and achieve penetration. This includes exploiting open cliques,
raising the zero penetration benefit, etc.
Toys for the
Boys or Jobs for the Girls. Distinguished Guest Lecture. BCS Cheltenham
and Gloucester Branch. 2.15pm Wed. 14th Nov. 2001, CGCHE, Cheltenham, UK.
ecology - managing the interconnected market groups of the Internet.
understanding the way feedback between different groups lead to market growth.
principles for designing complementary products that foster their own spread.
brief review of network effects and externalities literature in relation to
market ecology. bulletin
and the Real World
at SAICSIT'2001 - South
African Institute of Computer Scientists and Information Technologists Annual
Conference. Pretoria, 25-28 September 2001. extended
abstract and slides
Measuring the information loss in the supply chain and changes in the new economy.
+ marketing = product
Internet products are formed not just by design, but by how they are sold.
also in Interfaces, no.
48, Autumn 2001
in a strange land:
modelling and understanding cyberspace.
Interaction in the 21st Century". Graz, Austria, 13th January 2001
ecology and market engineering
understanding the networked market and designing products to transform
the e-Market and designing products to fit.
- issues and directions, London, Jan 2000
sharer vision -
the producer/consumer distinction breaks down on the web, a whole new class
of web products will emerge for the new class of web sharers.
pervasive, permanent access to the Internet.
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