The Network(ed) Economy

6 Simulation of the Diffusion of Network Effect Goods (S. 159-160)

The diffusion of communication standards such as traditional EDI standards, but also newer ones such as InternetEDI, WebEDI, or even XML-based data communication standards is lagging behind the expected degree of widespread use although the benefits accompanying with these standards were never in doubt. It is not only SMEs who have not completely adopted these standards, but also even large enterprises with massive communication traffic are often reluctant to adopt, and therefore do not use all possible electronic data communication standards.

EDI standards and communication standards in general seem to be special and different from other products or goods that can be used without the necessity of being a product that is widely adopted among other market participants. Therefore, the diffusion of such network effect standards is difficult to predict and often remains below the expected degree of diffusion. Standards which are not able to overcome the early phase of diffusion (from the start-up until reaching critical mass or threshold) will never become accepted market standards.

Apart from the diffusion of open, unsponsored EDI standards among firms this phenomenon is also observable for proprietary, sponsored standards in the telecommunication markets, such as for WAP, i-mode, or UMTS. While the anticipation of the possible diffusion paths of communication standards in unsponsored networks is of importance primarily for adopters (or potential adopters) of a new standard to enable them to decide whether to standardize or not, the anticipation of consumer behavior is also of importance for providers. If, e.g., a sponsored standard is competing with an unsponsored one, then a provider has a choice of certain market parameters for her penetration strategy.

Apart from subsidized prices or side payments, a provider can also stress certain components of a standard during the diffusion stage to meet the demands of potential adopters in accordance with the results of the market simulation. From an economic perspective, a focus on the user of a standard rather than concentration on the supplier is more interesting in terms of understanding the development of a user network characterized by adopter-side economies of scope. The findings of the microeconomic bottom-up view of the adoption behavior of single market participants reveal market strategies for suppliers, while an inverse macroeconomic top-down view cannot. As described earlier, the question of how to describe or even solve the start-up problem for communication and compatibility standards in network effect markets remains unanswered.

Due to the complex interplay between adopters of standards and the network benefits which change constantly during the diffusion process, the detailed analysis of all network externalities linked with the adoption is necessary to describe all possible paths of diffusion. Earlier research work on the diffusion of standards in network effect markets has focused on the allocation implications and market structure after overcoming the start-up problem, i.e. the market concentration tendency of sponsored standards towards a monopolistic market. But whether, however, the critical early diffusion phase up to the point of reaching critical mass can be overcome and described methodically, remains open so far.