Determinants of diffusion in network effect markets

While economic theory of positive network externalities is focussing rather on the installed base of a given product than on structural properties of the personal network which influences the individuals’ decisions, geographical and sociological network analysis covers many structural properties but does not adequately model the dynamics of diffusion processes itself when strong externalities exist. Our paper integrates both approaches into a simulation model of the actual diffusion process and identifies determinants predicting its result. While heterogeneity of preferences, high product prices and a decentralized, regional or sparse structure of the network prevent concentration, homogeneous preferences, low prices, high connectivity, a random “global” topology or a centralized structure of the network promote concentration towards a single product.

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