Chapter 9: Social Networks and the Economics of Networks
Daniel Birke* 1. INTRODUCTION The work by Arthur (1989) and the other literature on path dependence are prominent in many evolutionary arguments. Path dependence arises in increasing return technologies and describes the property that for many technologies, historically small events can have a profound and lasting impact on the development path of technologies. It is well understood that technologies with increasing returns can exhibit multiple equilibria and that these equilibria can often be local rather than global optima. Causes for increasing returns can be learning and network eﬀects. The models of path dependence, however, have been based on rather simple assumptions about the choice behaviour of consumers in markets with network eﬀects. The empirical question remains: how do consumers choose between rival products in a market with network eﬀects? Consumers interact with other consumers in a variety of ways. Information about products and services is often spread by word of mouth and individuals are more likely to choose a product about which they have heard from a friend or which they have tried out with the help of a friend. In many cases, consumers also try to associate themselves with their peer group by consuming similar goods, try to imitate consumption behaviour of groups which they regard as having higher ‘social status’ and try to distinguish themselves from groups with lower ‘social status’ (see Cowan et al., 1997). Network eﬀects have been treated in the literature mainly as an only positive peer eﬀect, where every...
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