Abstract
Many IT enabled networks have attained a large user base induced by strong network effects, which are thought to create an economic moat by increasing switching costs, thus offering protection against new entrants. The underlying assumption behind this result is that users completely adopt one network at any given time. Is the incumbency protection power of the moat as strong in multi-homing when users co-exist on multiple networks and can incrementally adopt a new entrant? We develop a multi-period analytical model of endogenous adoption decisions in a setting where a new network arrives with a superior capability, and where users have a resource constraint and derive value from technological capability as well as network effects. We demonstrate that the moat created by network effects for the case of incremental adoption is weaker than that in the case of complete adoption. Thus the protection power of network effects and the resulting competitive intensity may be overrated and underplayed respectively in many modern technology settings.
Recommended Citation
Barua, Anitesh and Mukherjee, Rajiv, "The Incumbency Protection Power of Network Effects: Hype or Reality?" (2011). ICIS 2011 Proceedings. 9.
https://aisel.aisnet.org/icis2011/proceedings/breakthroughideas/9
The Incumbency Protection Power of Network Effects: Hype or Reality?
Many IT enabled networks have attained a large user base induced by strong network effects, which are thought to create an economic moat by increasing switching costs, thus offering protection against new entrants. The underlying assumption behind this result is that users completely adopt one network at any given time. Is the incumbency protection power of the moat as strong in multi-homing when users co-exist on multiple networks and can incrementally adopt a new entrant? We develop a multi-period analytical model of endogenous adoption decisions in a setting where a new network arrives with a superior capability, and where users have a resource constraint and derive value from technological capability as well as network effects. We demonstrate that the moat created by network effects for the case of incremental adoption is weaker than that in the case of complete adoption. Thus the protection power of network effects and the resulting competitive intensity may be overrated and underplayed respectively in many modern technology settings.