The interaction between direct and indirect network externalities in the early diffusion of mobile social networking

Abstract

The early diffusion of mobile social networking (MSN) reflected the interplay of different factors: the affordability of better Internet connectivity and the diffusion of Smartphones suitable for Social Networking Applications. These key technology and cost drivers facilitated both the direct and indirect network externalities, which are necessary to overtake critical adoption barriers and facilitate users' decisions. However, a key challenge in modeling MSN diffusion is in distinguishing among the impact of these two types of network externalities. This paper addresses such a challenge by adopting a two-stage estimation strategy. In the first stage, we focus on direct network externalities by estimating a set of country-specific adoptions peaks that allow differentiating between early and late adopters. In the second stage, we estimate the impact of indirect network externalities on MSN diffusion while also considering the role of pricing strategies. Our results provide significant evidence that indirect network externalities can exert opposite effects on adoption between early adopters and followers, depending on whether they adopt before or after a country's MSN diffusion peak.