Network effects: Do they warm or chill a budding product?

Goldenberg, Libai, and Muller (2010) argue that network effects may slow the takeoff and growth in sales of a new product as adopters wait for sufficient others (threshold) to adopt. They call this the chilling effects of network externalities. They carry out a cellular automata experiment to examine how changes in certain parameter values affect profits due to this effect. They also adapt the Bass model to compute the chilling effect in five markets. Goldenberg et al. (2010) have produced a fine piece of research on the role of network effects in new product growth. Their adaptation of the Bass model is clever and their results appealing. However, their works seem to echo a persistent theme in the economics literature, that network effects have negative effects that can lead to inefficient and perverse markets (e.g., Church & Gandal, 1993; Farrell & Saloner, 1986; Katz & Shapiro, 1986, 1992). With due respect to their rigorous analysis, our research seems to suggest just the opposite — that network effects enhance the efficiency of markets (Tellis, Yin, & Niraj, 2009a,b). To show this effect, I will point to two issues, omitted variables and an enhanced perspective of network effects.

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