The Network Effect on Technology Diffusion
https://eml.berkeley.edu/~bhhall/papers/HallKhan03%20diffusion.pdf
In the paper “Adoption of New Technology”, the author discusses different kinds of determinants of technology diffusion, including both the demand and supply sides. One of the demand determinants is the network effect, which means that a consumer’s satisfaction from the consumption of the technology increases as the network of either consumers or the technology itself increases.
The author uses the implementation of ATMs as an example to illustrate the influence of the network size of technology. The benefit of an ATM not only depends on its functionality, but also depends upon the geographical coverage of ATMs. With more ATMs available in different regions, consumers gain more benefits since they can get access to their bank accounts in various locations. This can be demonstrated by the network model we have talked about in class. For each consumer, he chooses a bank to open an account based on the accessibility and availability of banking services. For instance, there are two banks, A and B. A has more ATMs than B. Holding other factors the same, the consumer will perceive bank A as more accessible because there are more bank A’s ATMs around him. His payoff from A, which equals a constant value times the number of bank A’s ATMs, will be higher than his payoff from B due to fewer bank B’s ATMs.
Also, the author talks about how the social network will impact the diffusion of technology. As technology has a larger consumer base, it provides more complementary services which will increase consumers’ utilities. As mentioned in the paper, this kind of complementary goods belongs to the indirect network effects. The social network model we have discussed in class can be applied to explain the effect of the number of total consumers. For instance, for a consumer, he is connected to two kinds of other consumers: one group choosing technology A and another choosing technology B. Assuming the value of technology A and B are the same, because the number of consumers choosing technology A is greater, the total payoff for the consumer to choose A is greater. Therefore, he will choose to consume technology A, leading to the diffusion of technology.