Network, Externalities, and the Economics of On-line Services

Abstract

In information industry, the existence of network externalities makes sense of the increasing returns to information technology. This paper questions that whether the on-line services enhance economic performances, or are they efficient? The argument is simple: On-line service will enhance economic performances if it economizes transaction cost while organizing transactions. On-line service develops a market for information, then whether it enhances economic performances depending on if there is an information management system which can minimize the transaction costs while using the internet market to organize transactions of commodities or information. In most on-line cases, the transaction costs are related to the existence of network externalities, because consumers have to form expectations about product quality when they choose on-line consumption. I will not use sophisticated analytical procedure to analyze this issue, I will simplify this analysis by examining two types of on-line services: on-line public services and on-line profit-oriented services.