Systems Competition and Network Effects
Abstract
This paper discusses firm behavior, market performance, and the public and private institutions that arise in systems markets, i.e., markets where consumers use compatible components together to generate benefits. In such markets, which include communications networks and ‘hardware/software’ networks, popular products are inherently more valuable. These ‘network effects’ can drive corporate strategies and are critical in understanding innovation in many high-technology markets. The discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not.
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Cross-side network effects exist, in which the value of the platform for one side of the market is positively related to the size of the other side of the market.
“The existence of cross-side network effects, in which the value of the platform for one side of the market (e.g.clients) is positively related to the size of the other side of the market (providers) (Katz & Shapiro, 1994)”
From Algorithmic human resource management: Synthesizing developments and cross-disciplinary insights on digital HRM (2021) · cites this paper as Katz & Shapiro, 1994
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“First, they can potentially charge consumers for the initial app download and pursue pricing strategies such as price discrimination across customer groups or cross-subsidization of products (Katz & Shapiro, 1994; Rochet & Tirole, 2003).”
- Authors
- Katz, M. L., & Shapiro, C.
- Affiliations
- Federal Communications Commission (US)
- University of California, Berkeley (US)
- Venue
- Journal of Economic Perspectives
- Publisher
- American Economic Association
- Published
- 1994-05-01
- Volume
- 8
- Issue
- 2
- Pages
- 93-115
- ISSN
- 0895-3309 (ISSN-L)
- OpenAlex
- W2172169275
- Cited by
- 2,646
- References
- 0
- Citations by year
- 2026: 81 · 2025: 149 · 2024: 115 · 2023: 102 · 2022: 106 · 2021: 95 · 2020: 96 · 2019: 97 · 2018: 89 · 2017: 76 · 2016: 80 · 2015: 104 · 2014: 104 · 2013: 111 · 2012: 94
- FWCI
- 71.02
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- The Journal of Economic Perspectives (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Strategy and Management › Digital Platforms and Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Social Sciences › Decision Sciences › Management Science and Operations Research › Innovation Diffusion and Forecasting
- Keywords
- network effects, component compatibility, consumer adoption, innovation, high-tech markets, communication networks, business strategy, market performance, public and private institutions
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