Effects of consumer tastes in markets with network externalitie

When there exist Network Externalities (NE), markets tend to tip over to one dominant technology. On the other hand, differentiated consumer tastes can limit the tendency toward tipping to enjoy diversity. To investigate the relative importance of the two offsetting effects, this thesis suggests an economic model incorporating both NE and product differentiation. By generalizing consumer distribution of the Hotelling model, the theoretic model shows that in spite of the duopolistic industry structure firms' market powers can be considerably limited when a large fraction of consumers are ready to switch with small changes in market prices.;Based on this, a structural econometric model is constructed to recover both consumer utility and taste distribution. In application, the model is estimated for the network competition between IBM PCs and the Apple Macintosh. Using a unique and extensive household level dataset for 1994--2004, the results show that: (1) there exist significant network externalities; (2) market tastes have changed in favor of the IBM PC whereas relative quality favors the Apple Macintosh; (3) the existence of a relatively large fraction of consumer strongly oriented towards the Apple Macintosh undermines the IBM PC's market power and keeps the market from tipping; and (4) consumer welfare would decrease if the market were standardized on one platform.;Finally, nonparametric identification of the econometric model suggests that both consumer utility and taste distribution can be nonparametrically identified with less restrictive assumptions but higher data requirements. This generalized econometric model also indicates a new approach to markets where consumer preferences are rather product-specific than characteristic-specific.