Reconsidering Network Effect Theory

According to Network Effect literature network externalities lead to market failure due to Pareto-inferior coordination results. We show that the assumptions and simplifications implicitly used for modeling standardization processes fail to explain the real-world variety of diffusion courses in today’s dynamic IT markets and derive requirements for a more general model of network effects. We argue that Agent-based Computational Economics provides a solid basis for meeting these requirements by integrating evolutionary models from Game Theory and Institutional Economics.

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