Identification of network externalities in markets for non-durables

This paper introduces a structural econometric model of consumer demand for nondurable goods, which exhibits network externalities. The structural model allows us to identify the parameters, which determine the strength of the externalities in the underlying economic model from the empirical estimation results. The estimates of these parameters can then be employed to test the economic significance of the externalities and the compatibility of networks. The identifying assumption that drives our results is that consumers care about the lagged instead of the current network size. We argue that it does not necessarily bound their rationality. To complete our structural model, we provide an example of functional specification that yields a simple linear stochastic model of demand. Using this functional specification, we identify all structural parameters of the model. In the end, the estimation and the stochastic structure of the resulting econometric model are discussed.