Analysis On Local Network Externality

Network externality is one of the most important and basic characteristics in Network Economics.In most literature,this concept is usually global,meaning that the utility to all users will increase with a new user's joining,and the outcome will be tipping most probably.However,sometimes it fails to explain the real world.In some markets,even a leading product already taking over almost the whole market, there still are some competitors with small but stable market shares.The controversy is partly attributable to the overemphasis on installed bases in prior work,where the role of social network is largely missing in the discussion of the network effects.In other words,the network externality may be local but not global.It means that the utility of the product to a user will not increase definitely with a new user's joining.Rather than valuing an increase in the size of a product's user base or network in general,each agent values adoption by a subset of other agents,and this subset varies across agents.The recent literature on local network externality usually takes local network externality as a basic hypothesis during analyzing and modeling without detail explanation about it.In this paper,I argue some detail about local network externality,including when it plays,how it plays and its influences on the market outcome.I quote some theory about complex social network to analyze the structure of user network,where potential agents are specified by a graph representing an underlying social network,in order to explain better when and why the local network externality plays so an important role in the agent adoption progresses that it could not be ignored.After introducing some typical conclusion about network externality,I analyze the characteristics of the user network,the impact between the neighbors on the adoption so as to illustrate the role of the local network externality.By developing two simple models of new product diffusion progresses based on global network externality and local network externality respectively,I compare the influences of these two network externality on the market outcome.At the last part of this paper,I take the Instant Messaging Market in China as an instance to make the role of local network externality better understood.The conclusion is that in a market with local network externality,a potential user' adoption is only affected by a subset of other users.The extent of influences also depends on the extent of connection between two.So besides considering the general factors which are related to global network externality,the researchers should keep a close eye on the structure of social network,which would play an important role in the diffusion processes.