The Network Effect

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Some products generate value only when they are combined with others, otherwise they have small or no value at all in isolation (Katz and Shapiro, 1994, p. 93). This is so called network effect – the fact that higher consumption of specific products makes them more valuable (Sundararajan, 2003, p.1). Another scientist Leibenstein, calls this effect as “bandwagon effect”- “the extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity” (Besen, 1999, p.1). The economical base of network effects has received a huge attention, since it appears to be important in understanding the key features of modern high-tech industries (Bresnaham, 2001, p.2). Transportation systems, telecommunication systems, etc. exhibit network externalities, especially the IT market (Lee and O’Connor, 2003, p. 242). Operating systems of computers and compatible software are some of the examples of products experiencing network effects. Users prefer to have an operating system on which they will be able to install a large number of applications (Fisher, 2000, p.181).

The purpose of this paper is to understand the how the network effects of Microsoft’s products contributed to its rise and dominance in the market. In order to answer this question, the following points should be explained and analyzed. First of all, the environment of network industries in which Microsoft operates must be discussed. Moreover, such terms as “critical mass” and the way it is generated; “tipping points” and their impact on the products’ future, etc. should be described. Furthermore, the strategies and tactics, which are used by Microsoft to keep its positions in the market, should be outlined.

The reminder of this ...

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...uct (Economides, 1998). Also, Microsoft bundled Internet Explorer to its operating system, aiming to create a similar installed base for IE so that it would create an entry barrier to rival browsers. They moved the entry of competitors. More over, it is important to mention that a “firm like Netscape has less incentive to develop and write software applications if Microsoft can develop its own version of these software applications and bundle them with Windows” (Clements, 2002, 13).

The technical development of the Ethernet technologies also helped Microsoft. According to the With Paper, several millions were invested in intra-net networks, into servers, working networks etc. That made Microsoft first company whose products were able to operate in huge networks. This in turn, attracted large organizations and government institutions to Microsoft’s product.

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