Network Effects in Action
34 Pages Posted: 19 Nov 2020 Last revised: 11 Jan 2021
Date Written: November 11, 2020
This Chapter begins by examining and exploring the theoretical and empirical limits of the possible bases of network effects, paying particular attention to the most commonly cited framework known as Metcalfe’s Law. It continues by exploring the concept of network externalities, defined as the positive external consumption benefits that the decision to join a network creates for the other members of the network, which is more ambiguous than commonly realized. It then reviews the structural factors needed for models based on network effects to have anticompetitive effects and identifies other factors that can dissipate those effects. Finally, it identifies alternative institutional forms that can eliminate or mitigate the impact of network effects.
Keywords: Antitrust law & poicy, economics of networks, externalities, Metcalfe's Law, competition, market failures, consumer welfare
JEL Classification: D40, D62, K21, L40
Suggested Citation: Suggested Citation