The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Network Goods (Theory)

  • Paul Klemperer
Reference work entry


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.


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 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Arthur, W.B. 1989. Competing technologies, increasing returns, and lock-in by historical events. Economic Journal 99: 116–131.CrossRefGoogle Scholar
  2. Arthur, W.B., and A. Rusczcynski. 1992. Dynamic equilibria in markets with a conformity effect. Archives of Control Sciences 37: 7–31.Google Scholar
  3. Bresnahan, T. 2001. Network effects in the Microsoft case. Discussion Paper No. 0051, Stanford Institute for Economic Policy Research, Stanford University.Google Scholar
  4. Bulow, J., and P.D. Klemperer. 1999. The generalized war of attrition. American Economic Review 89: 175–189.CrossRefGoogle Scholar
  5. David, P. 1985. Clio and the economics of QWERTY. American Economic Review 75: 332–337.Google Scholar
  6. Dybvig, P.H., and C.S. Spatt. 1983. Adoption externalities as public goods. Journal of Public Economics 20: 231–247.CrossRefGoogle Scholar
  7. Farrell, J., and P.D. Klemperer. 2007. Coordination and lock-in: Competition with switching costs and network effects. In Handbook of industrial organization, vol. 3, ed. M. Armstrong and R. Porter. Amsterdam: North-Holland.Google Scholar
  8. Farrell, J., and G. Saloner. 1985. Standardization, compatibility and innovation. RAND Journal of Economics 16: 70–83.CrossRefGoogle Scholar
  9. Farrell, J., and G. Saloner. 1986. Installed base and compatibility: Innovation, product preannouncements, and predation. American Economic Review 76: 940–955.Google Scholar
  10. Froot, K.A., and P.D. Klemperer. 1989. Exchange rate pass-through when market share matters. American Economic Review 79: 637–654.Google Scholar
  11. Gabel, H.L. 1991. Competitive strategies for product standards. New York: McGraw-Hill.Google Scholar
  12. Katz, M.L., and C. Shapiro. 1985. Network externalities, competition and compatibility. American Economic Review 75: 424–440.Google Scholar
  13. Katz, M.L., and C. Shapiro. 1986a. Product compatibility choice in a market with technological progress. Oxford Economic Papers 38: 146–165.CrossRefGoogle Scholar
  14. Katz, M.L., and C. Shapiro. 1986b. Technology adoption in the presence of network externalities. Journal of Political Economy 94: 822–841.CrossRefGoogle Scholar
  15. Katz, M.L., and C. Shapiro. 1992. Product introduction with network externalities. Journal of Industrial Economics 40: 55–83.CrossRefGoogle Scholar
  16. Klemperer, P.D. 1995. Competition when consumers have switching costs. Review of Economic Studies 62: 515–539.CrossRefGoogle Scholar
  17. Leibenstein, H. 1950. Bandwagon, snob and veblen effects in the theory of consumers’ demand. Quarterly Journal of Economics 64: 183–207.CrossRefGoogle Scholar
  18. Liebowitz, S. 2002. Re-thinking the network economy: The true forces that drive the digital marketplace. New York: American Management Association.Google Scholar
  19. Liebowitz, S.J., and S.E. Margolis. 1990. The fable of the keys. Journal of Law and Economics 33: 1–25.CrossRefGoogle Scholar
  20. Rohlfs, J. 1974. A theory of interdependent demand for a communications service. Bell Journal of Economics 5: 16–37.CrossRefGoogle Scholar
  21. Rohlfs, J. 2001. Bandwagon effects in high technology industries. Cambridge, MA: MIT Press.Google Scholar
  22. Segal, I. 1999. Contracting with externalities. Quarterly Journal of Economics 114: 337–388.CrossRefGoogle Scholar
  23. Shy, O. 2001. The economics of network industries. Cambridge: Cambridge University Press.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Paul Klemperer
    • 1
  1. 1.