NETWORK EFFECTS WITHOUT NETWORK EXTERNALITIES

The network externalities hypothesis postulates that consumers prefer to purchase brands which are bought by more consumers compared with brands with a low market share. In this paper, we show that increasing returns to scale in the production of complementary products can substitute for the network externalities assumption. We develop a model for the computer industry in which the production of complementary software requires a large fixed cost of development relative to the cost of duplicating and marketing the software. The increasing returns to scale in the production of software yields consumers' behavior which is very similar to consumers who have preferences exhibiting network externalities. © 1990.