Network Externalities, Cost Functions and Standardization

  • Hubert Stahn


In market structures with network externalities, it is often asserted that there is a natural tendency toward standardization. Several incompatible systems only survive, if the decision to produce these goods is a part of an intertemporal strategy. In this paper it is argued that in­compatible products may survive in static models. The model developed in this paper is close to the one used by Katz and Shapiro (1985). I develop a simple multi-product oligopoly in which the demand for one of these commodities increases with the number of agents consuming this good and in which cost functions are explicitly introduced. Apart from the issues of standardization, I also explicitly address the problems related to the exis­tence and the uniqueness of a rational expectation Cournot equilibrium


Cost Function Reservation Price Network Externality Consumption Externality Cournot Equilibrium 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. [1]
    Bessen S. and J. Farrell [1994] Choosing How to Compete : Strategies and Tactics in Standardization Journal of Economic Perspective 8 2:117–131CrossRefGoogle Scholar
  2. [2]
    Chou C and O. Shy [1990] Network effects without Network Externalities International Journal of Industrial Organization 8 : 259–270CrossRefGoogle Scholar
  3. [3]
    Church J. and N. Gandal [1991] Network effects, Software Provision and Standardization Journal of Industrial Economics 40 : 85–103Google Scholar
  4. [4]
    Farrel G. and G. Saloner [1986a] Installed Base and Compatibility : Innovation, Product Preannouncement and Predation American Economic Review 76 : 940–955Google Scholar
  5. [5]
    Farrel G. and G. Saloner [1986b] Standardization and Variety Economic Letters 20 : 71–74CrossRefGoogle Scholar
  6. [6]
    Farrel G. and C. Shapiro [1989] Optimal contracts with lock-in American Economic Review 79 : 51–68Google Scholar
  7. [7]
    Katz M. and C. Shapiro [1985] Network Externalities, Competition and Compatibility American Economic Review 75 : 424–440Google Scholar
  8. [8]
    Katz M. and C. Shapiro [1986] Technology Adoption in the Presence of Network Externalities Journal of Political Economy 94 : 822–841CrossRefGoogle Scholar
  9. [9]
    Katz M. and C. Shapiro [1994] System Competition and Network Effects Journal of Economic Perspective 8 2:93–115CrossRefGoogle Scholar
  10. [10]
    Liebowitz S-C and S. Margolis [1994] Network Externalities : An Uncommon Tragedy Journal of Economic Perspective 8 2:133–150Google Scholar
  11. [11]
    Perrot A [1993] Compatibility, Network and Competition : a Review of Recent Advances Transportation Science 27 2:62–72CrossRefGoogle Scholar
  12. [12]
    Rohlfs J. [1974] A theory of Interdependent Demand for a Communication Service Bell Journal of Economics 10 : 16–37Google Scholar

Copyright information

© Springer-Verlag Berlin · Heidelberg 1998

Authors and Affiliations

  • Hubert Stahn
    • 1
  1. 1.Bureau d’Economie Théorique et AppliquéeUniversité Louis PasteurStrasbourg cedexFrance

Personalised recommendations