Internet Forecasting and the Economics of Networks

Network economics suggests consumer willingness to adopt Internet services is an increasing function of the size of the network. The existence of network externalities in a dynamic setting increases the speed at which market demand grows in the presence of a downward trend for industry marginal cost. Given the possible existence of a network externality for Internet services and e-commerce, estimates of the size of the network effect are critical for forecasting demand. A model proposed by Economides and Himmelberg (1995) is adapted to a dynamic disequilibrium setting to describe the global Internet market. The model is estimated on cross-country panel data to yield a direct measure of the network effect. Due to the possibility of endogeneity, various instrumental variables to assess the robustness of the estimates are utilised.

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