Adoption of Information Technology Under Network Effects

Abstract

Because information technologies are often characterized by network effects, compatibility is an important issue. Although total network value is maximized when everyone operates in one compatible network, we find that the technology benefits for the users depend on vendor incentives, which are driven by the existence of “de facto” or “de jure” standards. In head-to-head competition, customers are better off “letting a thousand flowers bloom,” fostering fierce competition that results in a de facto standard if users prefer compatibility over individual fit, or a split market if fit is more important. In contrast, firms that sponsor these products are better off establishing an up-front, de jure standard to lessen the competitive effects of a network market. However, if a firm is able to enter the market first by choosing a proprietary/incompatible technology, it can use a “divide-and-conquer” strategy to increase its profit compared with head-to-head competition, even when there are no switching costs. When there is a first mover, the early adopters, who are “locked in” because of switching costs, never regret their decision to adopt, whereas the late adopters, who are not subject to switching costs, are exploited by the incumbent firm. In head-to-head competition, customers are unified in their preference for incompatibility when there is a first mover; late adopters prefer de jure compatibility because they bear the brunt of the first-mover advantage. This again underscores the interdependence of user net benefits and vendor strategies.

The effect of externalities on adoption of social customer relationship management (SCRM)

“…SCRM is an extension of CRM, which is a technology that possesses significant network effects in addition to its stand-alone benefits [54]. CRM, like ERP and other types of interorganizational systems, allows a firm to benefit from both the direct network effects of being able to exchange object information with business partners and the indirect network effects of interdependency with other organizations.…”

Competition in wearable device market: the effect of network externality and product compatibility

“…Most studies about network externality investigate product compatibility and standardization or market entry [46]. The Competition in wearable device market: the effect of network… common finding in these studies is that network externalities can increase the price competition between firms [47] and that firms should let their products be more compatible [9,47]. Among these studies, Li and Chen [14] employ the Hotelling setup to study employer's decisions about purchasing from a single seller to enforce standardization and sellers' decision about product compatibility.…”

Diffusion of innovation: customer relationship management adoption in supply chain organizations

“…The inclusion of network externalities in our research model enables us to go beyond the TTF theory rationale for organizational adoption to examine how interorganizational effects also contribute to adoption. CRM is a technology that possesses significant network effects in addition to its stand-alone benefits [48]. CRM, like ERP and other interorganizational systems, allows a firm to benefit from both direct network effects such as exchanging object information with business partners and indirect network effects resulting from interdependency.…”