The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Network Goods (Theory)

  • Paul Klemperer
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2178

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.

Keywords

Compatible products Competition for the market Competition policy Coordination Entry Excess early power Excess inertia Excess momentum Herding Indirect network effects Intellectual property Lock-in Market share Microsoft Multiple equilibria Network effects Network externality Penetration pricing Pre-announcements Product variety Proprietary technology QWERTY Standards Switching costs Tipping 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Paul Klemperer
    • 1
  1. 1.