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Testing Metcalfe's law: Pitfalls and possibilities

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  • Van Hove, Leo

Abstract

A small but burgeoning body of literature has tried to assess whether Metcalfe's law provides a realistic yardstick for the value of specific networks. In this paper, I uncover a number of flaws in the extant tests. First, a proper test of Metcalfe's law—or of any of the competing “laws”—requires correct identification of the type(s) of network effects involved and the relevant market(s). Second, a multi-market setting typically calls for scaled network sizes. Third, controlling for intertemporal changes in network quality may be imperative. Finally, indicators at the individual and aggregate levels should not be mixed. Armed with these insights, I re-examined Madureira et al. (2013)’s results. Unlike Madureira et al., I found that Metcalfe's law fits the data better than Briscoe's law.

Suggested Citation

  • Van Hove, Leo, 2016. "Testing Metcalfe's law: Pitfalls and possibilities," Information Economics and Policy, Elsevier, vol. 37(C), pages 67-76.
    • Handle: RePEc:eee:iepoli:v:37:y:2016:i:c:p:67-76
    DOI: 10.1016/j.infoecopol.2016.09.001
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    References listed on IDEAS

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    1. Garcia-Swartz, Daniel D. & Garcia-Vicente, Florencia, 2015. "Network effects on the iPhone platform: An empirical examination," Telecommunications Policy, Elsevier, vol. 39(10), pages 877-895.
    2. Leo Hove, 2014. "Metcalfe’s law: not so wrong after all," Netnomics, Springer, vol. 15(1), pages 1-8, July.
    3. Madureira, António & den Hartog, Frank & Bouwman, Harry & Baken, Nico, 2013. "Empirical validation of Metcalfe’s law: How Internet usage patterns have changed over time," Information Economics and Policy, Elsevier, vol. 25(4), pages 246-256.
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    14. A. Madureira & F. Hartog & N. Baken, 2016. "A holonic framework to understand and apply information processes in evolutionary economics: survey and proposal," Netnomics, Springer, vol. 17(2), pages 157-190, September.
    15. Hiroshi Ohashi, 2003. "The Role of Network Effects in the US VCR Market, 1978–1986," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 447-494, December.
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    Cited by:

    1. Arturas Sabalionis & Wenbo Wang & Hail Park, 2021. "What affects the price movements in Bitcoin and Ethereum?," Manchester School, University of Manchester, vol. 89(1), pages 102-127, January.
    2. Garcia-Swartz, Daniel D. & Muhamedagić, Mensur & Saenz, Diana, 2019. "The role of prices and network effects in the growth of the iPhone platform," Technological Forecasting and Social Change, Elsevier, vol. 147(C), pages 110-122.
    3. Jacopo Arpetti & Antonio Iovanella, 2020. "Towards more effective consumer steering via network analysis," European Journal of Law and Economics, Springer, vol. 50(3), pages 359-380, December.
    4. Van Hove, Leo, 2018. "Quantifying and interpreting network effects: ‘Own-network’ is not the same as ‘firm-level’," Information Economics and Policy, Elsevier, vol. 45(C), pages 47-51.
    5. Carlos Lamela-Orcasitas & Jesús García-Madariaga, 2023. "How to really quantify the economic value of customer information in corporate databases," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-13, December.
    6. Van Hove, Leo, 2017. "A note on “Cooperative interconnection settlement among ISPs through NAP”," European Journal of Operational Research, Elsevier, vol. 261(2), pages 800-802.
    7. Matteo Cinelli & Giovanna Ferraro & Antonio Iovanella, 2022. "Connections matter: a proxy measure for evaluating network membership with an application to the Seventh Research Framework Programme," Scientometrics, Springer;Akadémiai Kiadó, vol. 127(7), pages 3959-3976, July.
    8. Hemang Subramanian & Sabyasachi Mitra & Sam Ransbotham, 2021. "Capturing Value in Platform Business Models That Rely on User-Generated Content," Organization Science, INFORMS, vol. 32(3), pages 804-823, May.

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    More about this item

    Keywords

    Metcalfe's law; Network value; Network effects; Digital information networks; Internet;
    All these keywords.

    JEL classification:

    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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