Internet network externalities

Abstract: A driving force behind the emergence of the ‘new’ or information economy is the growth of the internet network capacity. A fundamental problem in mapping this dynamic is the lack of an acceptable theoretical framework through which to direct empirical investigations. Most of the models in the literature on network externalities have been developed in a static framework, with the externalities viewed as instantaneous or self-fulfilling. The model specified here builds on the received theory from several sources to extend these features and develops a dynamic model that is both capable of econometric estimation and which provides as an output a direct measure of the network effect. Accordingly, the main goal of this paper is to find the magnitude of the external effect on internet network growth. In addition, this paper illustrates the ability of the panel data to generate estimates of structural parameters capable of explaining internet host growth.