Network Economics

EC 413 Network Economics Margolis

Network Economics

Based on my work with Stan Liebowitz, including Winners, Losers and Microsoft

and

The Fable of the Keys


Network Effects

A good exhibits a network effect if the benefits from using the good depend on the number of other users of the same or compatible goods.


Examples

• Telephones

• Fax machines

• Operating systems


A Market Failure?

We could all prefer the Beta format Videocassette, but nevertheless end up with VHS.


Or, Brian Arthur’s example 1989

Table 1. Payoffs to adopters of two technologies

Number of Adoptions 0 10 20 30 40 50 60 70 80 90 100

Technology A 10 11 12 13 14 15 16 17 18 19 20

Technology B 4 7 10 13 16 19 22 25 28 31 34


Why does it matter?

• Many new technology goods involve networks

• It casts doubt on the likelihood of “monopoly on the merits”

Clio and the Economics of QWERTY

1985Paul David publishes his paper on the typewriter keyboard. The paper had been presented at the annual meeting of the American Economic Association

It remains one of the most cited papers in economics.



Qwerty v. Dvorak: The Fable

• 1867 Christopher Latham Sholes

• 1873 Remington

• 1888 Cincinnati contest

• 1936 August Dvorak

• 1944 The Navy Study

• Dvorak’s own studies

• Paul David


The evidence

• Evidence mostly from Dvorak’s own flawed experiments.

• He supervised the Navy Study

• 1956 Navy Study

• Ergonomic studies


Our Conclusion

As a practical matter, the Dvorak keyboard offers little advantage over the QWERTY keyboard.


Or, Brian Arthur’s example 1989

Table 1. Payoffs to adopters of two technologies

Number of Adoptions 0 10 20 30 40 50 60 70 80 90 100

Technology A 10 11 12 13 14 15 16 17 18 19 20

Technology B 4 7 10 13 16 19 22 25 28 31 34


Three types

• Persistence—simple durability

• Persistence that enshrines forecast error

• Persistence that results in remediable error, particularly where the timing or sequencing of decisions leads away from more desirable alternatives


The Other fables

• VHS v. Beta

• The Bob-Tailed Coal Car

• Uniform laws


Why are the failures so hard to find?

An inefficiency means that there is some reallocation for which the benefits exceed the costs.

That situation constitutes a profit opportunity for someone who can bring about the reallocation and appropriate some of the benefit.

Network Economics

Documents

Transcript of Network Economics