Publications and Research

Document Type


Publication Date



Positive network effects arise where incremental product use increases the utility of users of compatible products (user-positive effects), but also in situations where product use imposes negative externalities that selectively affect the adopters of incompatible alternatives (nonuser-negative effects). This paper compares the social optimality of firms’ incentives for compatibility under these two regimes. Using a “location” model of differentiated products, I find that, under both regimes, incentives for unilateral action to increase compatibility tend to be suboptimal when firms’ networks are close in size, but they may be excessive for small firms when networks differ greatly in size. The result is consistent with prior analysis of the user-positive context (e.g., Katz & Shapiro, 1985), but challenges the intuition that activities involving negative externalities are always oversupplied in an unregulated market. Public policy implications are discussed.


This article was originally published in the International Journal of Economics and Finance, available at DOI: 10.5539/ijef.v7n6p1.

This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution license (

Included in

Economics Commons



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.