Incompatible Entry in Small-World Networks

Abstract

The issue of whether a new incompatible technology can challenge an established technology has been controversial in the literature on network effects. Some argue that such incompatible entry is difficult when the established technology has built up its installed base. Others argue that history reveals many counter-examples. Instant messaging (IM) was, for example, thought to be a classic case of lock-in, but it turned out not to be. This paper argues that this controversy is partly attributable to the overemphasis on installed bases in prior work, where the role of the social network is largely missing in the discussion of network effects. By developing network effects models with various network structures, we offer a resolution to the controversy. We find that degrees of separation, one of the defining properties of small-world networks, affect the difficulty of incompatible entry: The longer the degrees of separation of a customer network, the easier the incompatible entry.