Dictionary of Terms in Network Economics

Last Updated: 4/3/2003 Copyright © 1995-2003, N. Economides.

Bottleneck A part of the network for which there is no available substitute in the market. 
Compatible components Two complementary components A and B are compatible when they can be combined to produce a composite good or service. For example, we say that a VHS video player is compatible with a VHS tape. Two substitute components A1 and A2 are compatible when each of them can be combined with a complementary good B to produce a composite good or service. For example, two VHS tapes are compatible. Similarly, we say that two VHS video players are compatible. 
Increasing returns to scale  Increasing returns to scale exist when the cost per unit decreases as more units of the good are produced. Recently, the term "increasing returns to scale" has been used to describe more generally a situation where the net value of the last produced unit [= (dollar amount consumers are willing to pay for the last unit) - (average per unit cost of production)] increases with the number of units produced. 
Installed base The number of users (or units of the product sold) that share a particular software or hardware platform. For example, the installed base of VHS video players is the collection of video players of various manufacturers (JVC, Toshiba, Panasonic, etc.) that play VHS tapes.
Networks Networks are composed of complementary nodes and links. The crucial defining feature of networks is the complementarity between the various nodes and links. A service delivered over a network requires the use of two or more network components. 
Network externality A network exhibits network externalities when the value of a subscription to the network is higher when the network has more subscribers. In a traditional network, network externalities arise because a typical subscriber can reach more subscribers in a larger network. In a virtual network, network externalities arise because larger sales of component A induce larger availability of complementary components B1, ..., Bn, thereby increasing the value of component A. The increased value of component A results in further positive feedback. Despite the cycle of positive feedbacks, it is typically expected that the value of component A does not explode to infinity because the additional positive feedback is expected to decrease with increases in the size of the network 
Path-dependence Dependence of a system or network on past decisions of producers and consumers. For example, the price at which a VHS player can be sold today is path dependent because it depends on the number of VHS players sold earlier (on the installed base of VHS players). 
Virtual Network Collection of compatible goods (that share a common technical platform). For example, all VHS video players make up a virtual network. Similarly, all computers running Windows can be thought of as a virtual network. 

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