An example of how to fight "network externalities"

An interesting issue in the economics of antitrust is this: how can a firm trying to sell a product embodying a new standard compete successfully against an old, established standard? For instance, suppose your firm has developed a PC operating system that is much better than Windows. You ask Windows customers to buy it, but each customer responds something like this: "Yeah, we dislike Windows and we would love something better, but we get benefits from using the same product as most other people. There's more software available, there's more support, and it's easier to exchange files with people who use the same OS."

If all the potential customers think like this, then--allegedly--nobody will want to switch and your much-better product will never sell. This problem, often referred to as the problem of "network externalities", is supposedly serious enough that the antitrust authorities should take account of it. (And they rightly, therefore, sued Microsoft.)

But as anyone using Excel today rather than Lotus 1-2-3, or who is listening to music CDs rather than 8-track tapes, knows, the problem can be solved. For discussion see a number of the recent writings of Stan Liebowitz and Steve Margolis. (Winners, Losers & Microsoft is a good start.)

Finally, I come to the point of this post. One of the ways for entrants using a new standard supposedly can compete, as detailed by Liebowitz and Margolis, is to invest heavily up front. For instance, they can give the product away to early adoptors, or give away complementary products. (One of the early electric companies gave way light bulbs.) I'm always looking for empirical support for the theories I believe, though, so this offer on Amazon is interesting: buyers of a new-standard HD DVD player can get 10 new--count 'em, ten--HD DVDs free with purchase.

Comments

[jurisnaturalist]

Amazon, interestingly, is NOT giving away free titles for their new Kindle. The early adopters want it badly enough that they have bought all available units already. Is there a model for the degree of shift in technology and how it relates to early adopter acceptance.
The HD DVD technology is a smaller step up from regular DVD than Kindle is from 3 newspapers and two books in a bag.
Change in tech / Existing tech = 1 / a function of the # of free complimentary goods needed to attract adopters.

[david]

A nice network externality example that also has interesting 'theory of the firm' implications. It would appear that both the HD DVD player mfr. and the HD DVD movie supplier benefit from the adoption of an HD DVD format, so is this a joint promotion (by the mfr and movie supplier) and if not why? etc.