Network Externalities and Compatibility Among Standards: A Replicator Dynamics and Simulation Analysis
Authored by Torsten Heinrich
Date Published: 2018
DOI: 10.1007/s10614-017-9706-4
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Abstract
The importance of network externalities for the development of
technology and industry structure has been recognized in evolutionary
economic for a long time. However, network externalities are no isolated
phenomena. They are based on competing standards in a comprehensive
network of technology lines that are based on one another and remain to
various degrees interoperable or compatible. As some evidence from the
ICT sector inparticular shows, compatibility and tying or bundling of
standards may be employed as strategic tools. The present paper
investigates the economic role of tied standards for the dynamics of
competition between standards. A replicator model operating on an
aggregated level is complemented by an agent-based simulation with
explicit representation of the network structure among users. A variety
of effects are studied, including the role of initial usage share,
manipulation of compatibility, expansion of vendors into other segments,
as well as the network structure and central or peripheral positioning
of agents. The agent-based model contrasts a complete network and a
regular ring network with asymmetric network structures derived from
Barabasi and Albert's preferential attachment mechanism and triadic
closure.
Tags
Agent-based modeling
emergence
Increasing Returns
Network externalities
Replicator dynamics
Platform competition
Standard tying
Information
and communication technology
Preferential attachment networks