Direct and indirect network effects: are they equivalent?

Clements, Matthew T. “Direct and indirect network effects: are they equivalent?." International Journal of Industrial Organization 22.5 (2004): 633-645.


Network effects may be either direct or indirect. While many analyses conflate the two, I show that the ways in which direct and indirect effects influence technological standardization are quite different. Some parameter changes have opposite effects in the two models, and some factors which are irrelevant under direct effects are central under indirect effects. Compatibility in particular has a different interpretation and more subtle implications for standardization in the indirect model.

Network effects, Network externalities, Standards, Compatibility

JEL classification

  • L1

Endogenous product compatibility choice under Cournot competition with a network externality

Date: 2014-01
By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
We provide a simple model of endogenous product compatibility choice under Cournot competition with a network externality. Using the model, we consider how the degree of a network externality and product substitutability affects the choice regarding product compatibility. In particular, if the degree of the network externality is larger than that of the product substitutability, there exist multiple equilibria, involving imperfect, partial, and perfect compatibility. However, if another assumption formula regarding a spillover effect, which is a component of network size, is made, i.e., the converter case, there is a unique equilibrium, i.e., perfect compatibility, irrespective of the degree of the network effect versus product substitutability. Furthermore, we show that a perfectly compatible product standard is socially optimal and analyze, therefore, whether a social dilemma arises in the network products market.
Keywords: product compatibility, network externality, fulfilled expectation; Cournot duopoly, horizontally differentiated product
JEL: D21 D43 D62 L15