Pricing for the Anti-Network Effect: Models and Phenomena
(Published on: May 02, 2008)
Econ 204 ("Networks") was an interesting class in that it was cross-listed in four different departments, including CS, Information Science, Econ, and Sociology. I personally thought of it more as econ, so that's why I always refer to it as Econ 204, and not CS 285, for example. In any case, our final paper was to be about anything to do with networks, which wasn't too helpful in choosing a topic.
There's no abstract for this one, so here's the first paragraph:
Fax machines, instant messaging protocols, social networking sites--these are exampleswe’ve heard all but too many times when discussing goods that have network effects. Informally speaking, network effects describe how the value of a good to a buyer depends not onlyon their reservation price, but also on the number of other buyers who are also anticipatedto buy the same good. This is a very intuitive idea, as we can readily imagine the ridiculousness of owning the sole fax machine or being the only person on a social networking site.Fortunately, the notion of goods with network effects lends itself easily to a simple modelthat we explored in class, which successfully formalizes the general idea. Something thatwe didn’t consider, however, was the existence of goods with what I call the anti-networkeffect. In this paper, I hope to establish convincingly that the anti-network effect is in facta real phenomenon affecting a class of goods that we might call “exclusive”; I seek to arriveat a formal model to describe the notion of exclusivity in the framework that we have already established for positive network effects. Finally, using the model with both its insightsand limitations, I will present a discussion of strategies that can be used to enter a marketexhibiting the "exclusive goods" property.
