Abstract
Network effects arise where current users of a good gain when additional users adopt it (classic examples are telephones and faxes). The effects create multiple equilibria and fierce competition between incompatible networks; users’ expectations are crucial in determining which network succeeds. Early choices, such as the QWERTY typewriter keyboard, lock in the market; new entry, especially against established networks with proprietary technology, is often nearly impossible. Incompatible networks can induce efficient ‘competition for the market’, but more often create biases and inefficiencies. Policymakers should scrutinize markets where firms deliberately choose incompatibility.
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Klemperer, P. (2018). Network Goods (Theory). In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2178
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2178
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