Network Effects and Path Dependence - Research Paper Example

Network Effects and Path Dependence INTRODUCTION Bottom-line is considered to be determined by business net incomes, or Earnings Per Share (EPS). It is also stated to refer to certain activities that may result in an upsurge or a decline in the net earnings or the overall profit of an organization. It is observed that a corporation that is growing its net income or decreasing its product costs is acknowledged to be ‘improving its bottom line’. There generally exist four evaluation points related to bottom line which include analyzing, developing, implementing and evaluating (SlideShare Inc., “Bottom-line Evaluation: Measuring Results from”). THESIS STATEMENT The study intends to evaluate the claim that network effects are associated with path dependence and lock-in. DISCUSSION Network effect or direct-benefit effect is considered to be a vital part of economics and business. It is a kind of effect which determines that for certain sorts of decisions, an individual would incur an explicit benefit when he/she aligns their behavior with the behavior of other individuals. In this context, it is determined that the value of a product is directly dependent on the number of users using it (Kemper 67-84). Path dependence can be stated as a substitute analytical process for economics which is acknowledged to be a radical change of the neo-classical standards. It is a process of economic allocation where the arrangement of allocating determinates such as technology, factor, endowment, preference and institution not only depend on certain fundamentals but also depend on a particular contingent event. Instead of converting into an identified determinant, the process has undergone a number of potential equilibrium and selects it on the basis of the specific history of the process. It is worth mentioning that a positive feedback from the agents also helps in increasing the impact related to specific early selections and further actions that are to be done accordingly (1Liebowitz and Margolis, “Path Dependence, Lock-In, and History”; Perkins 1-8). However, numerous questions have been raised by a number of critics in order to derive an understanding regarding the conditions based on which an allocation path depends. The answer to this question can be provided by focusing on two issues which include the structure of the explicit network that helps in identifying the interdependency of the agent’s choice. Secondly, the characteristics of the rapidly emerging technological changes are also viewed to have an impact on the features of the different potential equilibrium and the permanence of “lock-in” to a specific path of allocation. In this context, David’s (1985) view can also be highlighted wherein he stated that the homomorphism of path dependency mainly depends on technology, institutions, organizations and other vital aspects. David has specified three situations which might work unruffled to make procedures of technological modification path dependent including, the methodological interrelatedness of structure component, along with changing cost and increasing return of scale. It is measured that this result in forcing agents to coordinate their choices and also lend determination to the resultant distribution (David 332-337). In a similar way, it has been viewed that W. Brian Arthur mainly focused him attention towards a single aspect i.e. increasing return stating that the adoption of return is only realized at a given point of time but dynamically. This increasing return may either emerge from the supply side resulting from the learning effect which is either learned through doing or using a product, or in the demand side as a result of positive network. In other words, it also takes into concern all those externalities that raise the benefits of a product or technology that arise for each user from the increasing number of users of the similar product. However, it is worth mentioning that either scenario results in receiving positive feedbacks from the macro state of the system to the selections of individual representatives, resulting in facto adjustment on a single system (Easley and Kleinberg 509-542). However, it was observed that in contrast to the concept of path dependence, S.J. Liebowitz and Stephen E. Margolis (1990) have highlighted two conditions under which they claim that distribution process is not path dependent. This owing to the fact that firstly, anticipation into the effects of choice and secondly chance to coordinate agents’ selections through communication, market interaction and the promotion of substitute techniques affect the externalities of a representative choice. Liebowitz and Margolis further highlight that purposeful behaviors from the representative at times override the mechanism that they understand to be the basis of path dependence which is considered to be the only aspect of the economy. It has also been viewed that in such scenario no agent has an incentive to change and that neither the economic agent nor the economist has a reason to care about the valuable aspects that may affect the economical factor of the market (2Liebowitz and Margolis 1-25). Considering the above stated discussion, it has been understood that both the economic agents and economists have vigorous causes to care indeed, both about the unanticipated efforts of variants and the obstacles that arise due to inadequate inter-navigability of externalities. However, it is worth mentioning that both premonitions and focused organizing actions may affect the paths of allocation. Additionally, the incompleteness of these deliberations of the situations for the path dependence is evident in concrete cases that fulfill each of the identified condition (David 332-337; Easley and Kleinberg 509-542; 2Liebowitz and Margolis 1-25). CRITICAL EVALUATION With reference to the above stated discussion, it can be stated that the path to a bursting characterization of the essential and adequate tangible conditions for path dependence begins with David’s view on the ultimate, abstract, necessary and sufficient condition. In this aspect, first there must exist multiple and feasible path of allocation and secondly, the factors or criteria that have been selected to act as a branching path must be compatible to any system level economics which directly match with what Arthur defined. Additionally, it has also been identified by both Arthur and David that optimistic response may diminish if aggregate return is exhausted at a significant level. Considering both the theorists view, it can be stated that decisions that put an allocation process in one path is alterable without the incurrence of much cost. Moreover, the entire marketing process can be moved to the path that is replicated to be ideal. Secondly, it has also been recognized that a lack of close link amid factors that facilitate to select between alternatives paths and the system-level economics issues at a stage provides ample opportunities to create an impact of particular contingent events. Moreover, it has also been viewed that the private and social costs or benefits of switching from one variety of software to another directly depend on the buying cost in internalizing the external factors that prevail in path dependent procedure. Considering the aspect of QWERTY keyboard style, it is believed that there exists no evidence on why the format in the keyboard has been placed in this manner. CONCLUSION Network effect is measured to be one of the most pertinent terms in today’s corporate world. With the growing competitors in the industry, it has become essential for every business to implement strategies that would not only help in developing new line of products but would also facilitate in maintaining their customer level. It is worth mentioning that in the aspect of software market, technological changes may affect the inherent value of alternative techniques. In this regard, it is vital for any company that it involves in software market development strategies that would not only aid in conquering the market but would also help in maintaining its leading position. With reference to the discussion, it can be affirmed that network effects are associated with path dependence and lock-in as these factors help in identifying and studying the elements that are very essential for any business which deals in software products. Works-Cited David, Paul A. “Clio and the Economics of QWERTY”. The American Economic Review, 75.2 (1985): 332-337. Print. Easley, David, and Kleinberg, Jon. “Network Effects”. Cambridge University Press, (2010): 509-542. Print. Kemper, Andreas. Valuation of Network Effects in Software Markets: A Complex Networks Approach. Springer. 1Liebowitz, S. J. and Margolis , Stephen, M. “Path Dependence, Lock-In, and History”. University of Michigan Business School. n.d. Web. 08 Dec. 2013. 2Liebowitz, S., J., and Margolis, Stephen, M. The Fable of the Keys. Journal of Law and Economics, 33.1 (1990): 1-25. Print. Perkins, Richard. “International Society for Ecological Economics Internet Encyclopaedia of Ecological Economics.” Technological “lock-in”: 1-8. Print. “Bottom-line Evaluation: Measuring Results from”. SlideShare Inc. 2010. Web. 08 Dec. 2013. Read More