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NETWORK EXTERNALITIES AND THE DETERMINANTS OF NETWORK SURVIVAL

Although much theoretical work has been done on the adoption of technologies and networks in the presence of externalities, there is scant empirical evidence of the existence of network externalities and how they influence why some networks fail and exit the market, while others remain competitive and evolve to become dominant. Using economic analysis of the sources of network externalities, this paper examines variables influencing the likelihood of a network’s survival. We use growth data for regionally shared electronic banking networks in the United States to examine the determinants of network survival in the retail electronic banking services context. We employ a duration modeling approach, which incorporates explanatory variables that enable us to discern patterns of survivability. The results show that networks with a greater installed base, higher growth rates, and higher operational efficiencies, and networks that are well established in the market are better able to survive. The results provide evidence of the importance of network externalities, which create value for consumers, adopting firms and network providers. Our results also support the idea that network goods exhibit a positive feedback effect: larger networks are often expected to prevail in the market and they indeed tend to grow larger and become dominant. Beyond our present application, the evaluative framework used in this research can be applied more broadly, to a spectrum of information technologies, electronic commerce settings and competitive interorganizational information systems that offer network externalities.