M&E

outcome depends on the way in which adoptions build up (i.e, on the path the process takes). Historical events matter

the good left-behind would need to bridge a widening gap if it is chosen by adopters at all. Installed base matters.

which good will dominate is not predictable in advance

the good that "takes the market" needs not be the one with the longer- term higher payoff

- coordination failures associated with excess inertia and excess momentum are an artefact of the simultaneous choices assumption

- If users can move sequentially, they will coordinate on the pareto-dominating good

excess inertia and excess momnetum are a real possibility even if choices are made sequentially

... each user only has incomplete information about the other users' preferences (which may conflict with hers)

... markets with indirect rather than direct NE

Consumers' stand-alone preferences matter -> horizontal (i.e. services appeal to a paricular segment of users) or veritcal (i.e., the quality of services is perceived as higher by all user)

Making networks compatible

users can be active on more than one platform at a time -> form of interoperability

1. Network effects drive users to join the same platform (higher network benefits) -> dominates single platform is more likely to capture the whole market

2. Horizontal differentiation leads consumers to join the platfrom that is closer to their tastes (stand- alone benefits) -> dominates co-exist in equilibrium

- Demand: consumers have heterogenous stand-alone valuations

- Imperfect competition with incompatible networks

- leads to a makret expansion effect

- reduces quality differentiation between firms

incompatibility means competing for the market

compatibility means competing in the market

platforms that connenct end users with content producers (e.g. music and manufacturers of devices (e.g. smart fridge)

- cross-group network effect: the more, the valuable for the other groups

- the magnitude of the network effects depend on its ability to use data from other voice assistans. Compatiblity issues are crucial.

1. Straightforward standardization

2. "Battle of the Sexes"

3. Pesky Little Brother

4. Standards war

firms agree to choose a particular version of the good

Firms agree that standardization is best, but disagree on standard

One firm prefers incompatibility while the other - the "Pesky Little Brother" - wishes to be compatible

Typically smaller firm that wants to connect to the large firm's network

No Nash equilibrium in pure strategies in this case

clear competition for the market: both firms prefer to compete to become the ex-post standard, resulting in as standards war

... relatively symmetric in size and do not have marked preferences for a particular good.

... the firm have marked (and diverging) prefences for a particular good.

1. Actors

2. Linkage

3. Leverage

Identify economic agents who want to interact and convince them  to become users.

Figure out how the participation of some users creates (or destroys) value for other users of the platform

Evaluate the relative strengths of the various network effects in order to activate thema s effectively as possible.

Identify groups of agents and draw the linkage map

- identify the various links at work

- how platforms can activate these links and make them work in their favor. 

- platform's objective: Take advantage of pos. feedback loops (mutual attraction spiral) where there is a pos. indirect network effcect for each group. Minimize and control negative indirect NE

Comes from an increase in participation in one group

Increase in participation in the other group, resulting from the pos. cross-group NE operating through the platform

- Maximize output force (depends on strength of CGNE)

- Minimize the effort needed to exert input force

Select the group with the largest output force (cross-group NE) and/ or the smallest input force (effort required to attract additional users)

- Outside options

- Stand-alone benefits

- Within group NE

- Marginal Costs

• interdependece between users' dicisions to join
• this issue in situations with direct network effects that emerge within a single group of users.
• Multiple equilibria: expectations are crucial!
  • null equilibrium: if consumers have pessimistic expectations about the users joining the platform, nobody joins in equilibrium.
  • importance of attracting a critical mass of users to generate optimistic expectations and lead to stable equilibrium
  • trick is to convince sufficiently many initial users.