Notes

Outline

Network effects.

Network effects. Physical connection networks.

Network effects.

Network effects.

Path-dependence and “lock-in.”

Path-dependence and “lock-in.”

Path-dependence and “lock-in.”

Path-dependence and “lock-in.”

Path-dependence and “lock-in.” The choice of QWERTY not entirely historical accident. There were many competing typewriters. There were many typing contests like the one in Cincinnati. Dvorak is not greatly superior to QWERTY. The Navy study. The importance of rhythm.

Path-dependence and “lock-in.” Sensitivity to starting point. But no inefficiency. Examples: Language. Side-of-the-road driving conventions.

Path-dependence and “lock-in.” Sensitivity to starting point. Imperfect information. Outcomes are regrettable ex post. But no inefficiency, in the sense that no better decision could have been made at the time.

Path-dependence and “lock-in.” Sensitivity to starting point. Inferior outcome. Inefficient, in the sense that the inferior outcome could have been avoided. Error is remediable.

Path-dependence and “lock-in.” Technology B is superior. Produces highest value in the long term. But Technology A has higher short-term payoffs. Example: QWERTY stops mechanical keys from jamming. Conclusion: choice of – and lock-in to – wrong standard.

Path-dependence and “lock-in.” But this result depends on imperfect information. If users could correctly forecast, they would adopt B. The real issue: which institutional structure will choose best under poor information? Do markets choose badly?

Path-dependence and “lock-in.” The role of a technology “champion.” Someone who “owns” a system has an incentive to see it adopted. Champions who forecast higher long-term payoffs can subsidize adoption in the short term. MS-DOS versus Apple and other examples. Competing champions and local knowledge.

Standards as barriers. Open versus closed. Some “semi-open.” Example: Windows Proprietary versus non-proprietary. Privately proprietary (IBM 360). “Collectively” owned (fax standards). Unowned (stereo systems, Linux?)

Anatomy of a network product.

Standards as barriers. If someone “owns” a standard, he or she has a property right to a restricted input. The compatibility attribute. Microsoft and the “applications barrier to entry.”

Standards as barriers. Standards as “essential facilities.” U. S. v. Terminal Railroad Association (1912). Ski slopes and copier parts.