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Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities

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Abstract

This paper develops a simulation model to investigate competitive technology diffusion, and focuses on examining the influence of customer learning on the evolution of market share when both technologies exhibit local network externalities. Results show that: (1) the equilibrium market share of the new technology is determined by two key factors: the characteristics of customer learning behavior and the strength of local network externalities; (2) moderate network externalities can be beneficial for new technology to dominate the entire market when customers adopt belief-based learning rule; (3) moderate learning rate would facilitate the diffusion of new technology when customers make their decisions based on reinforcement learning; (4) the decay of customer learning and the proportions of imitators in market would help the old technology establish advantage by maintaining demand inertia of customer. The joint effects of psychology of customer behavior and local interactions of customers offer a new mechanism to explain the diffusion of technology in a competitive market with network externalities.

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Acknowledgments

The authors would like to show their gratitude to the anonymous reviewers for valuable comments and suggestions which are helpful to improve the quality of this study. This work was supported by the National Natural Science Foundation of China (Grant No. 71102167, No. 71271193 and No. 71001040), Natural Science Foundation of Zhejiang Province (No. Y6110018), the Fundamental Research Funds for the Central Universities, Southwest University for Nationalities (Grant No. 13SZYQN38), and Management Science and Engineering Construction Funds of Southwest University for Nationalities (Grant No. 2012-XWD-S1201).

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  1. College of Management, Southwest University for Nationalities, Chengdu, 610041, China

    Liangjie Zhao

  2. School of Business Administration, Zhejiang Normal University, Jinhua, 321004, China

    Wenqi Duan

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  1. Liangjie Zhao
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  2. Wenqi Duan
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Correspondence to Wenqi Duan.

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Zhao, L., Duan, W. Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities. Comput Econ 43, 53–70 (2014). https://doi.org/10.1007/s10614-013-9374-y

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