Journal of Economic Perspectives: Vol. 8 No. 2 (Spring 1994)


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Systems Competition and Network Effects

Article Citation

Katz, Michael L., and Carl Shapiro. 1994. "Systems Competition and Network Effects." Journal of Economic Perspectives, 8(2): 93-115.

DOI: 10.1257/jep.8.2.93


This paper discusses firm behavior, market performance, and the public and private institutions that arise in systems markets, i.e., markets where consumers use compatible components together to generate benefits. In such markets, which include communications networks and 'hardware/software' networks, popular products are inherently more valuable. These 'network effects' can drive corporate strategies and are critical in understanding innovation in many high-technology markets. The discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not.

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Katz, Michael L. (U CA, Berkeley and US FCC)
Shapiro, Carl (U CA, Berkeley)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L23: Organization of Production
L51: Economics of Regulation
L13: Oligopoly and Other Imperfect Markets


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