DP9097 Direct and Indirect Network Effects are Equivalent: A Comment on Direct Direct and Indirect Network Effects are Equivalent: A Comment on 'Direct and Indirect Network Effects: Are They Equivalent?'

Author(s): Jeffrey Church, Neil Gandal
Publication Date: August 2012
Keyword(s): network effects, standardization
JEL(s): D43, L1
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9097

Clements (2004) makes the following two claims: (i) unlike direct network effects, increases in the size of the market do not, in the case of indirect network effects, make standardization more likely, but (ii) indirect network effects are associated with excessive standardization. We show in Clements? framework that neither of these results are correct: standardization is more likely as the number of software firms increases and when the type of market equilibrium is unique? there are only multiple networks or only standardization?there is never excessive standardization, but there could be insufficient standardization, just as is the case with direct network effects.