The Network(ed) Economy: The Nature, Adoption and Diffusion of Communication Standards

286 Pages·2006·3.15 MB·English

by  Roman Beck (auth.)

Roman Beck
The Network(ed) Economy
WIRTSCHAFTSINFORMATIK
Roman Beck
The Network(ed)
Economy
The Nature, Adoption and Diffusion
of Communication Standards
With forewords by Prof. Dr. Wolfgang Konig
andProf. Dr. RolfT.Wigand
Deutscher Universitats-Verlag
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Dissertation Universitat Frankfurt/Main, 2006
I.Auflage Juli2006
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ISBN-10 3-8350-0364-X
ISBN-13 978-3-8350-0364-4
Foreword
Modern communication channels together with new electronic media stan
dards are constantly changing traditional interaction patterns of humans and
even machines In an increasingly globalized and networked world. Such a
communication-based interaction is of pivotal economic importance in order to
manage efficiently inter-organizational cooperation and business information
flows. Consequently, the availability of generally accepted electronic commu
nication standards is essential in order to decrease communication-related
transaction costs.
Roman Beck elaborates in his dissertation The Network(ed) Economy the im
portance of the so far independently from each other discussed diffusion the
ory on the one hand and network effect theory on the other hand. However,
Roman Beck not only connects the two theories epistemologically, but also
develops and extends those theories by providing a network diffusion model.
The core of his model is the so-called network effect helix, where a dynamic
and self-enforcing interplay between direct and indirect network effects is de
ployed to simulate diffusion patterns and paths of communication standards. In
his analysis, Roman Beck especially focused on the critical diffusion period be
tween the market launch of a new communication standard and (in case of a
successful diffusion) the achievement of a critical mass of adopters. His re
search results and consequently the chosen title of the thesis are capable to il
lustrate the overall topic of his work in the interesting area between an incom
pletely interconnected "networked economy" on the one hand and a com
pletely interconnected "network economy". The difference between those two
scenarios is defined by the way electronic communication standards are
adopted and implemented. The traditional view on network economies is
strongly influenced by Coase and his model of hybrids or alliances as alterna
tive coordination forms for markets and hierarchies. Sourcing through the mar
ket is communication costs efficient when the asset specificity is extremely low
making additional communication or coordination with suppliers unnecessary.
On the other hand, in the case of products with a high asset specificity the
necessary amount and consequently costs of communication and coordination
with business partners can be extremely high. Then, a hierarchical sourcing or
self-production can be cost-advantageous compared to sourcing through the
market. However, the properties of most sourced goods are somewhere in-
Y! Foreword
between with average asset specificity and moderate necessity of communica
tion. In tills mid-range goods spectrum, improvements In communication and
system integration can lielp to further decrease transaction costs for coopera
tively sourced and produced goods in a networked economy whereas the
sourcing of goods with extremely low or high asset specificity will furthermore
be cost efficient by employing market or hierarchy as sourcing mechanism.
The different sourcing models already illustrate the Importance of inter-
organizational communication and cooperation for efficient business transac
tions. Therefore, developing a network diffusion model In order to be able to
explain agents' Independently and locally made adoption decisions for com
munication standards and furthermore, conceptualizing new business proc
esses and prototypical applications In order to Increase the degree of Inter-
organlzatlonal Integration Is a highly complex and challenging task Roman
Beck is mastering brilliantly. Apart from the thorough description and extension
of current knowledge and theories, Roman Beck's outstanding thesis capti
vates by Its true abundance of original, methodologically precisely compiled
results. In particular, Roman Beck was able to combine and extend network ef
fect theory by adapting and integrating models and constructs from diffusion of
Innovation theory. He classified for the first time sponsored and unsponsored
network effect goods into Musgrave's classification scheme of private and pub
lic goods and demonstrates convincingly why digital goods (and here espe
cially communication standards) are so particular. Roman Beck is intensely re
flecting and discussing the nature of network effect goods what finally allows
him to derive his network diffusion model with direct and Indirect network ef
fects as primary utility sources and drivers of communication standards diffu
sion.
Altogether, Roman Beck has substantially increased the knowledge within the
area of network effect theory, standardization, and diffusion theory. His
groundbreaking results disclose not only important methodical progress but
are also of significant importance for practitioners.
Prof. Dr. Wolfgang Konig,
Dean of the Faculty of Business Administration
and Economics, Johann Wolfgang Goethe University Frankfurt
Foreword
The Network(ed) Economy is a timely and important book. The play of words
in "network(ed)" is most appropriate and descriptive for today's global econ
omy, as networks are at the core of all economic and organizational life. Ro
man Beck's perspective of a networked, dynamic and multi-layered economy
shows convincingly how we rely today on the intricate web of relationships
among processes, structures, integration and innovation and how information
and information technology enable many of these reciprocal interactions. The
networked economy is shaped by the linkages among individuals, firms and
institutions resulting in patterns of economic behavior that drive and inhibit ac
tions. Moreover, we have realized how the fundamental structure of firms has
been altered and that networked structures enable new organizational forms.
Roman Beck sheds new light on essential characteristics of the networked
economy such as network effects, a new goods classification model, external
ities and entire network industries as well as the underlying communication
standards making this economy possible in the first place. A good number of
economic phenomena may be explained via such concepts. Based on a multi
tude of definitions in the literature, broad network effects could explain many
non-intended observations. Roman Beck, however, elegantly delineates his
own definition so that this problem does not arise.
This work is broadly influenced by the writings of Ronald Cease's transaction
cost theory, the late Ev Rogers' diffusion theory as well as the numerous writ
ers on network effects. The subject of the book is the economic analysis of the
characteristics of communication standards in the information economy, as
well as their adoption and diffusion within a network effect context. Roman
Beck succeeds in demonstrating the adoption and diffusion behavior of poten
tial users of network effect goods. Moreover, we learn about the resulting dif
fusion paths and dynamics within the emerging networks. Lastly, the author of
fers a diffusion model, the network effect helix, that contributes to identify net
work-specific diffusion Influence factors. This network effect helix analyzes
how the diffusion of pure network effect goods gets started, how their utility
changes over their life cycle and which factors are significant in order to estab
lish a standard per se in the market.
This writer saw many chapters and concepts in this book evolve over the last
few years as Roman Beck and he met frequently in Frankfurt, but also at ICIS,
VIH Foreword
EClS, AIS, HICSS, the Bled International Electronic Commerce Conference
and other conferences. Additional Insights were gained and idea exchanges
occurred at an MIS Quarterly (MISQ) workshop on standards in Seattle, WA,
resulting in a special issue on standards by MISQ edited by John King and
Kalle Lyytinen, as well as a special issue on vertical information systems stan
dards of Electronic Markets: An International Journal, edited by this writer, M.
Lynne Markus and Charles W. Steinfield. Many concepts and ideas found their
impetus in the large-scale National Science Foundation-funded multi-year
Global Electronic Commerce (GEC) project conducted within ten nations, as
well as through ideas gained at the semi-annual meetings at the Center for
Research on Information Technology and Organizations (CRITO), University
of California at Irvine. Roman Beck, Wolfgang Koenig and this writer were re
sponsible for the report on Germany as one of the ten nations participating in
the Global Electronic Commerce project. This project demonstrated how the
Internet and electronic commerce are bringing countries together to create a
global networked economy. The GEC project addressed: (1) scientific under
standing of the relationship between national environments and the use and
impacts of e-commerce, (2) benchmarks for future studies of national and
global trends, (3) business metrics for global e-commerce markets; and (4) in
sights for policy makers who seek to maximize the benefits of e-commerce.
This book is a must-read for and belongs into the personal library of all those,
i.e. academicians as well as practitioners and policy makers, who strive to
shape our new digital world by harnessing information and information tech
nology.
Prof. Dr. RolfT. Wigand,
Maulden-Entergy Chair and Distinguished Professor of Information Science
and Management, Department of Information Science
CyberCollege, University of Arkansas at Little Rock
Preface
An advice a young PhD student gets very soon in his academic career is:
Make it short! Well, some of us at least tried to write an as short as possible
dissertation but naturally each of us failed. Nevertheless, in order to stay on
track and to remain focused good advisors, colleagues, and friends are indis
pensable for all of us to complete our personal PhD adventure successfully.
Therefore, I am deeply indebted to my advisor, Prof. Dr. Wolfgang Konig, for
his guidance and support and for giving me the freedom to conduct my own
research. He was encouraging me to improve my work and to submit my re
sults to conferences and journals, which definitely was a good exercise for the
final preparation of my dissertation.
I am also thankful to Dr. Tim Weitzel, Daniel Beimborn, and Jochen Franke for
their support, fruitful discussions and several research papers we have written
together. Thank you friends!
I am also grateful to the members of my committee. Prof. Dr. Gerriet Muller,
Prof. Dr. Dr. h.c. Dieter Biehl, and Prof. Dr. Roland Holten. In particular, Dieter
Biehl has helped me to furnish the public goods and infrastructure theory part
for what I am very thankful. Furthermore, I would like to thank Prof. Dr. Rolf T.
Wigand and Prof. Dr. John L. King for their support throughout all the years
and for their thorough cross reading of my thesis. Both have been invaluable
sources of inspiration for my work.
The author is indebted to the German as well as the U.S. National Science
Foundation for their funding and financial support of the two research projects
"IT Standards and Network Effects" (funded by the German National Science
Foundation) and "Globalization and E-commerce" (funded by the U.S. National
Science Foundation). Both projects have been invaluable and essential for me
and my research.
Everybody who survived his or her personal PhD project knows that the dark
est hour is just before dawn. The last months before completing a thesis are
the most difficult of all: often you cannot see the light at the end of the tunnel.
In such moments, you definitely need somebody who believes in you and en
courages you. Therefore, my special thanks go to you, Claudia.
Dr. Roman Beck
Table of Contents
Foreword V
Foreword VII
Preface IX
Table of Contents XI
Figures XV
Tables XVII
Equations XIX
Variables and Symbols XXI
Abbreviations XXV
1 Introduction 1
1.1 Motivation and Research Questions 3
1.2 Structure of the Dissertation 9
2 Diffusion and Innovation Theory 15
2.1 Business Environment 15
2.2 Innovation Theory 17
2.2.1 Determinants of Innovations 18
2.2.2 Profit resulting from Innovations 20
2.2.3 Allocation of Innovation-based Profits 22
2.3 Diffusion Theory 23
2.3.1 Development of Diffusion Theory 24
2.3.2 Pivotal for Diffusion: The Adoption Decision 24
2.3.3 Impact of Institutions on the Diffusion Process 25
2.4 Diffusion of Public Goods and Infrastructure 27
2.4.1 Public Goods: Emergence and Definitions 28
2.4.2 Noncontributors, Free-riders and Market Failure 29
2.4.3 Standards and Network Goods: Private or Public Goods
Category? 31
2.5 Infrastructure and Networks as part of Public Goods 34
2.6 Diffusion Approaches in the Information Systems Discipline 37