Article

Adoption of Network Technologies in Asymmetric Oligopolies

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Abstract

We analyze a two-stage non-cooperative game where the firms choose first to adopt (either simultaneously or sequentially) one of two network technologies, and then compete on the market. The two-stage procedure and the assumption that firms have heterogeneous tastes with respect to the technologies lead to a novel treatment of network externalities. In particular, as the network of some firm enlarges, the change in this firm's payoff is shown to depend both on the newcomer's identity and on the composition of the networks and, as a result, is not necessarily positive.

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... This effect can be negative, as in the case of the so-called " game theoretic " models, in which an increase in the number of adopters negatively influences its profitability in the future (Reiganum, 1981), or positive, as in the case of models in which the stock of previous adopters is meant to produce a positive externality. This type of externality has been conceptualised in different ways, for example as a direct or indirect network effect ( Shapiro, 1985, 1994; Farrel and Saloner, 1985), as an informational cascade (Bikhchandani et al., 1992 and 1998; Banerjee, 1992). Finally, a last class of models claims that returns on adoption depends on the position of a particular adopter in the order of adoption. ...
... On the other side, the stock of previous adopters is meant to produce a positive externality. This type of externality has been often conceptualised at least in two ways: as a direct or indirect network effects ( Shapiro, 1985, 1994; Farrel and Saloner, 1985); or as an informational cascade (Bikhchandani et al., 1992 and 1998; Banerjee, 1992; Geroski, 2000). Network effects are considered to be one of the most important sources of increasing returns from adoption ( Shapiro, 1985, 1994; Farrel and Saloner, 1985, David and Greenstein, 1990; Choi and Thum, 1998; Belleflamme, 1998). ...
... This type of externality has been often conceptualised at least in two ways: as a direct or indirect network effects ( Shapiro, 1985, 1994; Farrel and Saloner, 1985); or as an informational cascade (Bikhchandani et al., 1992 and 1998; Banerjee, 1992; Geroski, 2000). Network effects are considered to be one of the most important sources of increasing returns from adoption ( Shapiro, 1985, 1994; Farrel and Saloner, 1985, David and Greenstein, 1990; Choi and Thum, 1998; Belleflamme, 1998). In the presence of network effects, the utility from adoption increases in the number of other adopters that purchase the innovation 2 . ...
Article
We empirically study the factors affecting the timing of adoption of a consumer technology. We account for four possible effects (epidemic, probit, stock, and order effect) in relation to the diffusion of portable digital audio players (DAPs) using an original dataset of several hundred potential adopters from eight European countries and Japan. Our findings suggest that each one of these effects, which are often incorporated into competing models of diffusion, contribute to explain the diffusion of DAPs. Thus while researches informed by a specific approach to the study of innovation diffusion could lead to important results, they also run the risk of accounting for only a part of the phenomenon. This consideration highlights the quest for a more comprehensive approach to diffusion studies.
... However, possessing the right technology may be more profitable than positive externalities from standardization. Examples include the work of Belleflamme (1998), in which the technology itself is more important than the rival's selection, or Axelrod et al. (1995), in which the firm gains competitive advantage if its rival does not add technology. In addition, as argued by scholars (Besen andFarrell 1994, Hauser et al. 2006) for some product categories, factors such as customer preference for differentiated products may impose negative externalities from standardization. ...
... Step 2, both firms make their decisions simultaneously (as in, e.g., Belleflamme 1998). We assume that the technology is being supplied by an exogenous source, and thus it makes sense that both firms are approached by or notice the technology around the same time. ...
... Proposition 2.4 thus displays the existence of symmetric excess inertia, as discussed by Farrell and Saloner (1986) and Belleflamme (1998 coordination mechanism on the part of at least one firm, which is outside the scope of our non-cooperative game. ...
... Some considerations directly emerge from the inspection of (11) and (12). First, when ...
... Other authors have noted that technological differentiation may reduce the market competition and increase profits(Belleflamme, 1998;Kim et al., 2018). ...
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We study how snob consumption externalities (SCEs) affect the adoption of a new technology in a vertically differentiated duopoly. We show that the leader firm does not adopt when SCEs are medium or high. From a social viewpoint, medium SCEs lead to excessive inertia (the leader firm should adopt, but it does not), and high SCEs lead to reverse adoption (the adopter is the wrong firm). Lower SCE thresholds emerge when the innovative step is large. Our findings suggest that selective policies must be implemented to increase market efficiency, including discouraging adoption.
... A major stumbling block to adopting management practices advocated under the umbrella of ECR is that EDI requires compatible computer systems which are expensive to set up and operate. ECR suffered from a lack of what economist's call "network effects" (Belleflamme, 1998;Katz and Shapiro, 1994). Network effects occur in markets for systems when the value of a system to one user is positively affected by another user joining and enlarging the system. ...
... There will not be as many profits to go around and managers will have to find new ways to make money in a truly competitive world. This is consistent with the theory of network creation and network effects (Belleflamme, 1998). As everyones' costs decline in a large efficient network, competition will increase and new networks will arise to define unique niche markets. ...
... Thus, the challenger may replace the incumbent to "lock" the market, which explains the challengers' success. Belleflamme (1998) proposed another explanation in the market of industrial technology. With heterogeneous cost structures both firms may coexist in equilibrium. ...
... Thus, Hanson (2000) suggested that Metcalfe's Law should be modified to reflect the value of communication between individuals. Belleflamme (1998) suggested that network externality exists only locally. Now a question results. ...
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An extensive literature review of consumption externalities is presented in this article. The review is classified into four sections: network externality, indirect network externality, congestion externality, and cross-consumer externality. The review of network externality is a fundamental part of this paper. In this paper, we first suggest two dimensions and provide a classification on consumption externalities. Similarities and dissimilarities among them are contrasted. We next review the literature on consumption externalities in four sections. Finally, we raise research opportunities, which can be further explored in four fields.
... Otherwise, technology spillovers become faint between software vendors who adopt very diverse technology structures. Technology spillovers are illustrated by Belleflamme [5], who shows that given two types of technologies, firms' marginal costs decrease in the number of firms adopting the same technology. Wiethaus [6], Moltó et al. [7], Kamien and Zang [8] make an analogous assumption that technology spillovers of two competitive firms are determined by their choices of technology profiles. ...
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Once installed by a larger population of consumers, software products become appealing targets for malicious agents and thus consumers’ security concern increases. Software vendors must balance quality investment for demand improvement and resulting security anxiety, particularly when deciding whether to choose diversified or similar technology with competitors. Technology choice becomes challengeable in that choosing similar technologies can increase the degree of technology spillovers, which, on the other hand, leads to more software vulnerabilities that are shared among vendors’ software products. Considering these elements, this paper analyzes two competitive software vendors’ quality investment for heterogeneous markets composed of a high-end market with particular quality requirement and a low-end market. I reveal that whether vendors target the high-end market or the low-end market, they may benefit from the risk of security threat because it may soften their price competition. An increase in the maximal potential of technology spillovers may harm the high-quality vendor even though it benefits the low-quality vendor. The high-quality vendor always benefits from the degree of technology diversification while the low-quality vendor benefits only if the risk of security is rather high. Meanwhile, I find the two competitive vendors may target the high-end market and the low-end market respectively even though they are symmetric. Furthermore, I show that compared with optimal industry market strategies, the vendors seem reluctant to be aggressive. Hence, the widely discussed argument that aggressive market strategies should be inhibited because of the resulting serious security concern is not always logical.
... We derive a corresponding result for vertically diierentiated products . Belleeamme ( 1998 ) analyses how rms decide which of two technologies to adopt if their marginal costs decrease in the number of rms adopting the same technology . Assuming Cournot competition and exogenously diierenti - ated products , Belleeamme shows that an equilibrium where all rms adopt the same technology is more likely the more diierentiated the products are . ...
Article
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
... There is still some discussion about how signi…cant network externalities are in producing market failures. 1 However, the literature that explores the adoption of technologies (Belle ‡amme, 1998; Kristiansen, 1996), standards and the lock-in of technologies (Witt, 1997; De Bijl and Goyal, 1995), compatibility issues (Baake and Boom, 2001), and product introduction (Katz and Shapiro, 1992) is extensive. We focus on another, less researched, aspect of network externalities: dynamic pricing under demand inertia. ...
Article
This paper analyses dynamic pricing in markets with network externalities. Network externalities imply demand inertia, because the size of a network increases the usefulness of the product for consumers. Because past sales increase current demand, firms have an incentive to set low introductory prices to be able to increase prices as their networks grow. However, in reality we observe decreasing prices. This could be due to other factors dominating the network effects. We use an experimental duopoly market with demand inertia to isolate the effect of network externalities. We find that experimental prices are consistent with real world observations rather than with theoretical predictions. Copyright © 2007 The Economic Society of Australia.
... Under more general assumptions on the demand function, Yi (1998) proved the existence of an agglomeration equilibria when all the firms and all the districts are symmetric, i.e., the requirements of Firm Independence and District Independence are both satisfied. Subsequently, Belleflamme (1998) has shown the existence of a Nash equilibrium in the case of Firm Independence. Belleflamme (2000) introduces a model with heterogeneous players, where, assuming linearity of spillovers (cost-reduction factors), he demonstrates the existence and uniqueness of an agglomeration equilibrium in the case of two districts. ...
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This paper considers a model of district formation that incorporates a notion of regional industrial systems. Each firm chooses its location from the set of existing industrial districts. The heterogeneous firms are distinguished by its "stand alone" district-dependent production and transportation cost.
... A major stumbling block to adopting management practices advocated under the umbrella of ECR is that EDI requires compatible computer systems which are expensive to set up and operate. ECR suffered from a lack Anetwork effects@ that can be realize with multiple users on the same network (Belleflamme 1998;Katz and Shapiro 1994). Under the ECR vision, establishing a set of individual, workable communications networks with computers at all stores that could communicate with computers of all suppliers was asking more than the industry could deliver. ...
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The use of electronic commerce for quality control and cost cutting efficiencies by the food and agricultural industries in the United States is the focus of this paper. The food industry engages in e-commerce through 1. Internet shopping for consumers called Business-to-Consumer (B2C) e?commerce 2. Business-to-business (B2B) Internet market discovery exchanges used by food suppliers at any point in the supply chain, and 3. Business-to-business (B2B) relationships that reduce costs and increase efficiencies in the procurement, storage and delivery of food to retail stores or distribution centers. This third use of e-commerce is the most highly developed and widely adopted. It allows retailers to share information about consumers' purchases and preferences with food manufacturers and farmers and for tracking food products' characteristics, source, and movement from production to consumer. This circle of information allows high quality and consistent products to be consumed at lower prices. This paper is about the development of e-commerce in the food industry, the economic concepts and goals that it meets, and the changes it brings to the industry. E-commerce both fosters and demands vertical coordination. It favors consolidation of firms. It changes the business culture from one of adversarial relationships to one of cooperation and trust. It changes the historical supply chain into a supply/demand loop while it lowers the cost of food. Policy issues arise around monopoly power, privacy, a diminution of variety, and the demise of small, undercapitalized firms.
... An important and key result of our model is the emergence of co-existing technology networks. This finding parallels the findings of Belleflamme [8] and Kauffman and Wang [35], who analyzed network technology adoption under oligopolistic market competition. ...
Article
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... He proved the existence of an agglomeration equilibria in the model that satisfies both firm independence and district independence, i.e., when all the firms and all the districts are symmetric. Subsequently, Belleflamme [22] has shown the existence of a Nash equilibrium in the case of firm independence. Belleflamme [23] introduces a model with heterogeneous players. ...
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This paper considers a model of district formation as a local socio-economic system incorporating the mix of local cooperation and competition, termed co-opetition. There are heterogeneous firms distinguished by their “stand-alone” district-dependent production and transportation cost. Every firm chooses its location when its production cost is affected by local socio-economic spillovers generated by other firms in the district. The firms take into account the reciprocal nature of local spillovers: while reducing their own costs, the firms also reduce the costs of their rivals. We show that the location game with a linear demand function yields an equilibrium for any number of firms and districts. We characterize both “agglomeration” equilibria, when all firms locate in one district, and “dispersed” equilibria, when firms locate in different districts. We demonstrate that a dispersed equilibrium can emerge only if firms' and districts' characteristics possess a sufficient degree of heterogeneity.
... Second, an extension of the current model might consider double-sided externalities in a neutral marketplace (Yoo, Choudhary and Mukhopadhyay 2003), where the buyer side and seller side influence each other. Third, it might be interesting to consider firms' participation in multiple exchanges (Belleflamme 1998). This is another fertile area for further research. ...
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... Kim et al. proposed a new standardization framework using network analysis and game theory to estimate the effect and analyze the actual process [36]. They used Belleflamme's two-stage equilibrium model to suggest a new technology centered standard method by implying function of technology differentiation rate and technology preference that was deduced by technology network analysis [37]. In the follow-up study, the case of the standards war between HD-DVD and Blu-ray was analyzed with patent data as an empirical case considering a dynamic framework. ...
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In a given environment, individuals with genetic properties that are appropriate for the environment are more likely to survive or produce more offspring than those who are not. In a standard competition, technical standards suitable for the environment are more likely to win than those that do not. In the 4th wireless telecommunication industry, technology standard Worldwide Interoperability for Microwave Access (WiMAX) and Long Term Evolution (LTE) compete with each other. The early time of the 4th wireless telecommunication industry, WiMAX had been considered as a first-moving technology standard. The first-moving technology standard is very important due to its possibilities to make the players with the standard to be on the advantageous position in the industry. However, potential strong technology standard LTE substituted the position of WiMAX and become surviving technology in the industry. To understand and interpret this standard competition process, we use Evolutionary game theory as its research methodology and consider the quality features and quantitative features of patent. From this research, we find that (1) LTE is more suitable for the environment than WiMAX. So LTE survive from the competition even though LTE is not a first-moving technology standard. (2) In determining surviving technology standard, key consumers can have a much greater impact than a number of suppliers.
... Participants with different or opposite interests may, for instance, be excluded from the coalition. Those who are excluded may go on to form their own committee (Axelrod, Mitchell, Thomas, Bennett, & Bruderer, 1995;Belleflamme, 1998;Bloch, 1995;Economides & Flyer, 1998;Greenlee & Cassiman, 1999). For instance, Bloch (1995) argues that the more firms are direct rivals, the more tempted they are to exclude rivals from their coalition. ...
Conference Paper
The standardization landscape in the information and communication technology industries is fragmented in many different standardization bodies, industry consortia, and alliances. The existence of competing standardization coalitions may prevent coordination on a common standard. There is a lot of debate among practitioners and analysts about whether this fragmentation creates a coordination failure. Competition between standardization coalitions may harm compatibility. It also helps to mitigate coordination failures that occur within industry-wide standardization bodies and coalitions. The negotiation process in a coalition can cause coordination failures of its own. Technology sponsors may insist on their preferred technology being accepted as standard. Their intransigence slows down the selection of a standard. Introducing competition between coalitions can speed up negotiations within them, and thus help to overcome this infra-committee coordination failure. A game theoretic model formalises this view. It explores the effect of competition between coalitions on the speed of decision-making and standardization. It finds that a fear for incompatibility may hold back competing committees to the point that a grand coalition may actually adopt a standard faster than competing committees would. This result debunks sweeping statements that industry-wide coalitions or standards bodies are necessarily slow compared to strategic alliances and consortia.
... The key dependency, as we will shortly show, is firm size. The emergence of co-existing networks in our examination is paralleled by the findings of Belleflamme [4], whose work examined network technology adoption under oligopolistic competition market structures. In contrast to our results for B2B ecommerce technology platform adoption, which emerge from the trade-off between procurement costs and supply uncertainties, Belleflamme's results depend on the degree of product substitutability that is observed in the market. ...
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This article presents an economic model of a monopoly retailer with supply and demand uncertainties that enables the study of incentives for B2B e-procurement technology investments that permit inventory coordination and operating cost control. In this context, we focus on the information technology (IT) adoption behavior of firms, emphasizing the trade-offs they make between managing supply procurement uncertainties and procurement costs. We distinguish among three kinds of B2B e-procurement technology platforms: traditional interorganizational systems (IOSs), open B2B platforms (especially electronic markets), and hybrid solutions. We find that larger firms tend to adopt costlier, but rely upon more certain procurement technologies, such as proprietary EDI. Smaller firms tend to adopt less costly procurement technologies that entail greater supply uncertainties, such as open B2B procurement platforms.
... The key dependency, as we will shortly show, is firm size. The emergence of co-existing networks in our examination is paralleled by the findings of Belleflamme [4], whose work examined network technology adoption under oligopolistic competition market structures. In contrast to our results for B2B e-commerce technology platform adoption, which emerge from the trade-off between procurement costs and supply uncertainties, Belleflamme's results depend on the degree of product substitutability that is observed in the market. ...
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This article presents an economic model of a monopoly retailer that enables the study of incentives for business-to-business (B2B) e-procurement technology investments that permit inventory coordination and improved operational control. We focus on the information technology (IT) adoption behavior of firms in the presence of agency costs and information uncertainty. We distinguish among three kinds of B2B e- procurement technology platforms that can be selected: traditional interorganizational systems (IOSs), open B2B platforms associated with electronic markets on the Internet, and hybrid solutions. We find that larger firms tend to adopt costlier, but rely upon more certain procurement technologies, such as proprietary EDI. Smaller firms tend to adopt less costly procurement technologies that entail greater supply uncertainties, such as open B2B procurement platforms.
... A major stumbling block to adopting management practices advocated under the umbrella of ECR is that EDI requires compatible computer systems which are expensive to set up and operate. ECR suffered from a lack of what economist's call "network effects" (Belleflamme, 1998;Katz and Shapiro, 1994). ...
... For this model the market demand equation is obtained based on a quadratic consumer utility function (such as in Bloch (1995) and Belleflamme (1998)) containing network effects (as suggested by Katz and Shapiro (1985)): ...
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This paper discusses the dynamic implications of learning in a large population coordination game, focusing on the structure of the matching process that describes how players meet. As in M. Kandori, G. Mailath, and R. Rob (1992), experimentation and myopia create 'evolutionary' forces that lead players to coordinate on the risk dominant equilibrium. To describe play with finite time horizons, it is necessary to consider the rates at which the dynamic systems converge. In large populations with uniform matching, play is determined largely by historical factors. When players interact with small sets of neighbors, evolutionary forces may determine the outcome. Copyright 1993 by The Econometric Society.
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We briefly review the rationale behind technological alliances and provide a snapshot of their role in global competition, especially insofar as it is based around intellectual capital. They nicely illustrate the increased importance of horizontal agreements and thus establish the relevance of the topic. We move on to discuss the organisation of industries in a dynamic context and draw out consequences for competition policy. We conclude with an outlook on the underlying tensions between technology alliances, competition policy, and industrial policy.
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Converters, emulators, or adapters can often make one technology partially compatible with another. The authors analyze the equilibrium market adoption of otherwise incompatible technologies when such converters are available and the incentives to provide them. While market outcomes without converters are often inefficient, the availability of converters can actually make matters worse. The authors also find that when one of the technologies is supplied only by a single firm, that firm may have an incentive to make conversion costly. This may lend some theoretical support to allegations of anticompetitive disruption of interface standards. Copyright 1992 by Blackwell Publishing Ltd.
Competition with lock-in Telecommunications Demand Modelling. An Integrated View ´ r444 P Standardization, compatibility and innovation
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Schmutzler, A., 1995. On the stability of geographical production patterns-the role of heterogeneitÿ and externalities, Working Paper, Alfred-Weber-Insitut, Universitat Heidelberg.