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Networks Experiment

Hal R. Varian. Networks Experiment. Color fax machine. You have a new technology for color fax machines Have licensed it to many sellers Technology can only be used by sender if receiver has color fax machine

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Networks Experiment

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  1. Hal R. Varian Networks Experiment SIMS

  2. SIMS Color fax machine • You have a new technology for color fax machines • Have licensed it to many sellers • Technology can only be used by sender if receiver has color fax machine • So there is a strong network effect---value to user of technology depends on number of adopters

  3. SIMS Setup of experiment • Your card shows the value v of the color fax machine to you if you adopt (standalone value) • If n people adopt (including you), your value is nv • I will write the cost of the fax machine on the board • You adopt the technology by standing up • Adopt (stand up) when the value of the fax machine to you is greater or equal to the cost on the board (will depend on number standing).

  4. SIMS Do it! • Run the experiment

  5. SIMS Analysis • Standalone values were 10,9,8,…,1 • vn = p : marginal user wants to adopt • n=10-v :everyone with value greater than or equal to that of marginal user adopts • Combine to give demand=supply condition • If n=10-v then v = 10 – n, substitute in vn = p to get equilibrium condition (10-n)n=p determining n • At n* “value to marginal adopter = cost of adoption” • Takeoff occurs when p = 9 = value if there is 1 adopter = (10-1) x 1 = 9

  6. SIMS Demand and supply P = 9

  7. SIMS Extensions • Give away some units early (penetration pricing) • Competing technologies (winner take all) • Two-sided network effects (DVDs, payment system, market)

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