Network Externalities and Standardization: A Classroom Demonstration

Abstract

This paper presents a classroom game that can be used to demonstrate network externalities, standardization, and switching costs. In the basic game students independently choose a technology whose value depends on the total number of students choosing that technology. In the next round, sequential decision-making is allowed which quickly leads to standardization. Introducing imperfect information and switching costs into subsequent rounds can lead to the real-world phenomenon of an inferior technology becoming the standard. This exercise can be used in Principles of Economics classes to teach these important concepts without requiring mathematical models. In more advanced classes, construction of the mathematical model behind the game may be assigned.

Exploring the Key Success Factors of Mobile Commerce in Taiwan

“…First, externality is an increasing returns effect that includes critical mass, lock-in, and social norms [51] [52] [53] [54].…”

“…Shum et al [51] hold that externality will occur when the economic utility of a product exceeds the size of its network. Ruebeck et al [52] consider network externalities as special kinds of externalities in which one person's utility depends on the number of other people in that person's network, that is, the number of other people who choose the same technology or brand. Oliver et al [53] define critical mass as "the idea that some threshold of participants or actions has to be crossed before a social movement explodes into being."…”

A Proposed Theoretical Model for Mobile Commerce Acceptance

“…Ruebeck et al consider network externalities as special kinds of externalities in which one person's utility depends on the number of other people in that person's network [24], so the number of other people who choose the same mobile applications .…”

A Classroom Demonstration for Teaching Network Effects

“…2. An alternative classroom demonstration for teaching network effects has been presented by Ruebeck et al (2003). This demonstration relies on the construction of an artificial utility function that, particularly at the principles level, can leave students wondering whether network effects are a real phenomenon.…”