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

The Value of Connections: Evidence from the Italian-American Mafia

YNY: 這是一篇難得一見的研究主題, 以吸毒的幫派紀錄估計組織犯罪網路之網路外部性和其價值。

Date: 2014-01
By: Mastrobuoni, Giovanni (University of Essex)
Using declassified Federal Bureau of Narcotics (毒品) records on 800 US Mafia members active in the 1950s and 1960s, and on their connections within the organized crime network, I estimate network effects on gangsters’ economic status. Lacking information on criminal proceeds, I measure economic status exploiting detailed information about their place of residence. Housing values are reconstructed using current deflated transactions recorded on I deal with the potential reverse causality between the economic status and the gangster’s position in the network exploiting exogenous exposure to potential pre-immigration connections. In the absence of pre-immigration data I use the informational content of surnames, called isonomy, to measure the place of origin. The instrument is valid as long as conditional on the characteristics of the gangsters (including the region of birth and a rich set of controls about the gangsters’ legal and illegal activities) such exposure influences the gangsters’ importance in- side the network (called centrality) but not the preference for specific housing needs. A standard deviation increase in closeness centrality increases economic status by between one forth (OLS) and one standard deviation (2SLS).
Keywords: mafia, networks, centrality, housing prices, value of connections, crime, surnames, isonomy
JEL: A14 C21 D23 D85 K42 Z13

Dynamic Network Competition

Date: 2013-09
By: Hanna Halaburda (Bank of Canada)
Bruno Jullien (Toulouse School of Economics)
Yaron Yehezkel (Tel Aviv University)
This paper considers a dynamic platform competition in a market with network externalities. We ask two research questions. The first one asks how the beliefs advantage carries over in time, and whether a low-quality platform can maintain its focal position along time. We show that for very high and very low discount factors it is possible for the low-quality platform to maintain its focal position indefinitely. But for the intermediate discount factor the higher quality platform wins and keeps the market. The second question asks what drives changes in the market leadership along time (observed in many markets, like smartphones and video-game consoles), and how such changes can be supported as a dynamic equilibrium outcome. We offer two explanations. The first explanation relies on intrinsic equilibrium uncertainty. The second explanation relies on the adoption of technology. One could expect such change in the market leader to be a sign of intense competition between platforms. However, we find that changes in leadership indicate softer price competition.

Coordination and Lock-In: Competition with Switching Costs and Network Effects

Joseph Farrell and Paul Klemperer (2007) “Coordination and Lock-In: Competition with Switching Costs and Network Effects," Chapter 31 in Handbook of Industrial Organization, Volume 3, 2007, Pages 1967–2072.

source:; see also for PDF

original Abstract:

Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power – over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such “competition for the market” or “life-cycle competition” can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later “tips” to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.


* Switching costs;
* Network effects;
* Lock-in;
* Network externalities;
* Co-ordination;
* Indirect network effects

JEL classification

* L130;
* L150;
* L120;
* L140;
* D430;
* D420

Herding with and without payoff externalities — an internet experiment

Mathias Drehmann, Jörg Oechssler,  and Andreas Roider " Herding with and without payoff externalities — an internet experiment."  International Journal of Industrial Organization, Volume 25, Issue 2, April 2007, Pages 391-415. DOI.


Most real world situations that are susceptible to herding are also characterized by direct payoff externalities. Yet, the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities. In this paper, we experimentally investigate the effects of several different forms of payoff externalities (e.g., network effects, first-mover advantage, etc.) in a standard information-based herding model. Our results are based on an internet experiment with more than 6000 subjects, of which more than 2400 participated in the treatments reported here, including a subsample of 267 consultants from an international consulting firm. We also replicate and review earlier cascade experiments. Finally, we study reputation effects (i.e., the influence of success models) in the context of herding.

Keywords: Information cascades; Herding; Network effects; Reputation; Experiment; Internet

JEL classification codes: C92; D8