Direct and Indirect Network Effects: Are They Equivalent?∗

Network effects may be either direct or indirect. While many analyses conßate the two, I show that the ways in which direct and indirect effects inßuence technological standardization are quite different. Some parameter changes have opposite effects in the two models, and some factors which are irrelevant under direct effects are central under indirect effects. Compatibility in particular has a different interpretation and more subtle implications for standardization in the indirect model. JEL classiÞcation: L1; keywords: network effects, network externalities, standards, compatibility ∗This paper is an adaptation of Chapter 1 of my doctoral dissertation at Northwestern University. I am very grateful to Jim Dana for his guidance of this work, and to David Besanko and Shane Greenstein for much valuable advice. I would also like to thank Keith Head and Tom Ross for helpful comments. Ramon Casadesus-Masanell, Charles Hope, Peter Klibanoff, Barry Nalebuff, Emre Ozdenoren, John Panzar, Bill Sandholm, and two anonymous referees provided useful suggestions on earlier versions. †University of Texas at Austin and University of British Columbia; [email protected].