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Network Economics

Network Economics. Based on my work with Stan Liebowitz, including Winners, Losers and Microsoft and The Fable of the Keys. Network Effects. A good exhibits a network effect if the benefits from using the good depend on the number of other users of the same or compatible goods. Examples.

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Network Economics

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  1. Network Economics Based on my work with Stan Liebowitz, including Winners, Losers and Microsoft and The Fable of the Keys EC 413 Network Economics Margolis

  2. Network Effects A good exhibits a network effect if the benefits from using the good depend on the number of other users of the same or compatible goods. EC 413 Network Economics Margolis

  3. Examples • Telephones • Fax machines • Operating systems EC 413 Network Economics Margolis

  4. A Market Failure? We could all prefer the Beta format Videocassette, but nevertheless end up with VHS. EC 413 Network Economics Margolis

  5. Or, Brian Arthur’s example 1989 EC 413 Network Economics Margolis

  6. Why does it matter? • Many new technology goods involve networks • It casts doubt on the likelihood of “monopoly on the merits” EC 413 Network Economics Margolis

  7. Clio and the Economics of QWERTY • Paul David publishes his paper on the typewriter keyboard. The paper had been presented at the annual meeting of the American Economic Association It remains one of the most cited papers in economics. EC 413 Network Economics Margolis

  8. Qwerty v. Dvorak: The Fable • 1867 Christopher Latham Sholes • 1873 Remington • 1888 Cincinnati contest • 1936 August Dvorak • 1944 The Navy Study • Dvorak’s own studies • Paul David EC 413 Network Economics Margolis

  9. The evidence • Evidence mostly from Dvorak’s own flawed experiments. • He supervised the Navy Study • 1956 Navy Study • Ergonomic studies EC 413 Network Economics Margolis

  10. Our Conclusion As a practical matter, the Dvorak keyboard offers little advantage over the QWERTY keyboard. EC 413 Network Economics Margolis

  11. Or, Brian Arthur’s example 1989 EC 413 Network Economics Margolis

  12. Three types • Persistence—simple durability • Persistence that enshrines forecast error • Persistence that results in remediable error, particularly where the timing or sequencing of decisions leads away from more desirable alternatives EC 413 Network Economics Margolis

  13. The Other fables • VHS v. Beta • The Bob-Tailed Coal Car • Uniform laws EC 413 Network Economics Margolis

  14. Why are the failures so hard to find? An inefficiency means that there is some reallocation for which the benefits exceed the costs. That situation constitutes a profit opportunity for someone who can bring about the reallocation and appropriate some of the benefit. EC 413 Network Economics Margolis

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