The Network Externalities Hypothesis and Competitive Network Growth

Building on an installed base model of network adoption in the economics literature, this article examines the impact of network externalities in the context of nationally shared electronic banking networks. We develop a decision framework for analyzing the situation in which banking firms, facing a choice between two networks, choose when to adopt to maximize their net benefits flow. We assess the impact of a move to network transaction switching called duality, a strategic decision to create technological compatibility between the networks. We also test two network externalities hypotheses with an econometric analysis, using growth data for CIRRUS and PLUS, the two largest nationally shared electronic banking networks. The empirical models are motivated by the decision framework. We found that technological compatibility resulted in additional growth of the electronic banking industry as well as the individual national shared networks. The results of this study are consistent with our network externalities hypotheses, and shed light on the competitive adoption and diffusion of IT innovations.

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