Government Intervention in Emerging Networked Technologies
53 Pages Posted: 30 Oct 2006 Last revised: 1 Jun 2014
Date Written: October 27, 2006
Some new technologies succeed, while others fail. Networks and multi-sided platforms are an important, but often-overlooked, explanation for these successes and failures. Many technologies will be successful only if their promoters can convince two (or more) sets of heterogeneous users to simultaneously embrace the technology. For example, in the case of credit cards, both consumers and merchants must decide to use the technology. For high definition (HD) televisions, both consumers and broadcasters must adopt the innovation. If only consumers adopted credit cards and HD, but merchants and broadcasters respectively did not, the technologies would fail: with no stores in which to use them, credit cards are as worthless (or perhaps even more so) than HD televisions that have no HD programming.
Because market success for many technologies requires coordination between different groups, there is a powerful incentive for innovators and entrepreneurs to get the government involved: government action, both direct and indirect, can strongly influence consumer and merchant behavior, and thereby ensure simultaneous adoption of the technology. Depending upon the situation, the government may (1) provide the information that allows individuals to coordinate their behavior; (2) pass legislation or adopt policies aimed at reducing concerns about a technology, (3) provide incentives to induce individuals to adopt new technologies, or (4) force change by eliminating or curtailing older technologies. In this paper, we model how various groups decide whether to adopt and use networked and multi-platform technologies. We also explore when, if ever, the government should involve itself in influencing the success of such technologies. Drawing primarily on a rich set of examples from the payments industry, we conclude that the government generally should not intervene. First, technology moves fast and the government usually moves slowly. Second, with a bit of time, new technologies that are sufficiently advantageous are likely to flourish without government intervention. Third and finally, government interference may have the unintended consequence of dampening the incentive to invest in new technologies in the first instance.
Keywords: Payments, Norms, Electronic Commerce, Law, Banking, Government
JEL Classification: A13, D71, E4, E40, E5, E52, H3, K20
Suggested Citation: Suggested Citation