Network Externalities in the Japanese Market of Routers (2003.12)

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CPDP- 1-E (PDF:91KB)	"Network Externalities in the Japanese Market of Routers" (2003.12) Tatsuo TANAKA(Keio University and Competition Policy Research Center, Fair Trade Commission of Japan) Reiko MURAKAMI(Competition Policy Research Center, Fair Trade Commission of Japan) This paper examines network externalities in the Japanese market of routers. Although all routers adopt the same interface, i.e. TCP/IP protocol, implementation of the interface depends on the vendor. Thus compatibility of routers is not perfect among vendors. Cisco’s implementation is said to be the de-facto standard owing to its overwhelming market share. This fact suggests that network externalities are at work in the router market. First we conducted a survey of major router users asking the reasons for vendor choice to examine network externalities. Results imply that network externalities work. Second we estimated a hedonic price model. Results show that share variable has a significant and positive effect on price, which suggests there are network externalities. However, the latest characteristic variable also has an effect on price sufficiently large as to overcome network externalities. Third we applied the logit model to router choice using individual users’ choice data. Estimation results also show that share variable has a significant effect on choice probabilities. JEL classification codes: D12, L11, L13, L96 Keywords: Network Externalities, Router, Internet, Hedonic Price Model, Discrete Choice Model

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"Network Externalities in the Japanese Market of Routers" (2003.12)
Tatsuo TANAKA(Keio University and Competition Policy Research Center, Fair Trade Commission of Japan)
Reiko MURAKAMI(Competition Policy Research Center, Fair Trade Commission of Japan)
This paper examines network externalities in the Japanese market of routers. Although all routers adopt the same interface, i.e. TCP/IP protocol, implementation of the interface depends on the vendor. Thus compatibility of routers is not perfect among vendors. Cisco’s implementation is said to be the de-facto standard owing to its overwhelming market share. This fact suggests that network externalities are at work in the router market. First we conducted a survey of major router users asking the reasons for vendor choice to examine network externalities. Results imply that network externalities work. Second we estimated a hedonic price model. Results show that share variable has a significant and positive effect on price, which suggests there are network externalities. However, the latest characteristic variable also has an effect on price sufficiently large as to overcome network externalities. Third we applied the logit model to router choice using individual users’ choice data. Estimation results also show that share variable has a significant effect on choice probabilities.
JEL classification codes: D12, L11, L13, L96
Keywords: Network Externalities, Router, Internet, Hedonic Price Model, Discrete Choice Model