Network Externalities and the Dynamics of Markets

Keilbach, M. & Posch, M. (1998). Network Externalities and the Dynamics of Markets. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-98-089

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Abstract

The evolution of markets on which network externalities prevail can be expected to differ from "classical markets" where no such externalities exist. We suggest a flexible formal model that describes the dynamics od types of markets. This leads to a stochastic version of the well known replicator dynamics. Based on this approach we analyze the limit behavior of different market types where consumers use stochastic decision rules. We show that market shares converge to the set of equilibria with probability one, where, even under network externalities, several technologies can coexist. On the other hand, even if no network externalities prevail it is possible that only one technology stays in the market. This paper contributes to the work on generalized urn schemes and path dependent processes going on at IIASA.

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