Network Effects in the Mobile Communications Industry: An Overview

Abstract

Information technology (IT) markets, in general, and mobile telecommunications, in particular, represent a large and growing portion of today’s economy. They are one of the main sources of economic growth in modern economies (Greenspan 2000) and provide the basis for the development of a knowledge-centric world. The rapid development of these markets and the central role that they play in the economy have attracted the attention of a large number of researchers who have shifted their emphasis from traditional markets to the so-called New Economy. When dealing with these markets, however, it is important to understand that they are governed by a unique set of characteristics that may render wellestablished principles and managerial practices invalid (Shapiro and Varian 1998). One of the most significant distinctive features of these markets is the central role played by the network of users. In IT markets, customers derive utility not only from the product/service itself, but also from the networks surrounding these products (Frels, Shervani, and Srivastava 2003). This is because the installed base of users offers benefits to existing and potential customers in the form of reduced uncertainty, compatibility, the transfer of technical and non-technical information between members of the network and the increased availability and quality of complements, among others (Farrell and Klemperer 2007). This feature explains why IT markets are frequently referred to as network markets (Shankar and Bayus, 2003; Tanriverdi and Lee, 2008). Mobile communications, video games and software are just three examples of businesses where network effects drive market competition and consumer behavior. The network of users becomes a central strategic asset for assessing the firm’s current and future competitive position (Shankar and Bayus 2003; McIntyre and Subramaniam 2009) and, as a result, the understanding of network effects has become a top priority for researchers and practitioners alike. The previous discussion can help explain why network effects have emerged as a trendy topic in recent years in economics and management literatures. This research stream focuses on understanding how network effects alter the way in which firms compete. This increasing interest is due to the evidence that network industries seem to challenge much of