IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v49y2003i4p553-570.html
   My bibliography  Save this article

Exploration and Exploitation in the Presence of Network Externalities

Author

Listed:
  • Jongseok Lee

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea, and Center for Emerging-Technology Assessment, Science and Technology Policy Institute, 395-70 Shindaebang-dong, Tongjak-gu, Seoul 156-714, Korea)

  • Jeho Lee

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea)

  • Habin Lee

    (School of Management Information, Paichai University, 439-6 Doma 2-dong, Seo-gu, Taejon, Korea)

Abstract

This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this study is motivated by the divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors by maintaining compatibility with the established architecture, whereas it was radically replaced by RISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibility than ordinary users. Our numerical analysis indicates that the exploration of a new, incompatible technology is more likely to increase the chance of firm growth when there are a substantial number of power users or when a new technology is introduced before an established technology takes off.

Suggested Citation

  • Jongseok Lee & Jeho Lee & Habin Lee, 2003. "Exploration and Exploitation in the Presence of Network Externalities," Management Science, INFORMS, vol. 49(4), pages 553-570, April.
  • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:4:p:553-570
    DOI: 10.1287/mnsc.49.4.553.14417
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.49.4.553.14417
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.49.4.553.14417?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    2. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    3. James G. March, 1991. "Exploration and Exploitation in Organizational Learning," Organization Science, INFORMS, vol. 2(1), pages 71-87, February.
    4. Stephen J. Mezias & Mary Ann Glynn, 1993. "The three faces of corporate renewal: Institution, revolution, and evolution," Strategic Management Journal, Wiley Blackwell, vol. 14(2), pages 77-101, February.
    5. Christensen, Clayton M., 1993. "The Rigid Disk Drive Industry: A History of Commercial and Technological Turbulence," Business History Review, Cambridge University Press, vol. 67(4), pages 531-588, January.
    6. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-596, September.
    7. Eirik Gaard Kristiansen, 1998. "R&D in the Presence of Network Externalities: Timing and Compatibility," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 531-547, Autumn.
    8. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    9. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
    10. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    11. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    12. Theresa K. Lant & Stephen J. Mezias, 1992. "An Organizational Learning Model of Convergence and Reorientation," Organization Science, INFORMS, vol. 3(1), pages 47-71, February.
    13. David, Paul A. & Bunn, Julie Ann, 1988. "The economics of gateway technologies and network evolution: Lessons from electricity supply history," Information Economics and Policy, Elsevier, vol. 3(2), pages 165-202.
    14. Levinthal, Daniel & March, James G., 1981. "A model of adaptive organizational search," Journal of Economic Behavior & Organization, Elsevier, vol. 2(4), pages 307-333, December.
    15. Argote, L. & Epple, D., 1990. "Learning Curves In Manufacturing," GSIA Working Papers 89-90-02, Carnegie Mellon University, Tepper School of Business.
    16. Dennis Epple & Linda Argote & Rukmini Devadas, 1991. "Organizational Learning Curves: A Method for Investigating Intra-Plant Transfer of Knowledge Acquired Through Learning by Doing," Organization Science, INFORMS, vol. 2(1), pages 58-70, February.
    17. Daniel A. Levinthal & James G. March, 1993. "The myopia of learning," Strategic Management Journal, Wiley Blackwell, vol. 14(S2), pages 95-112, December.
    18. Nelson, Richard R & Winter, Sidney G, 1977. "Simulation of Schumpeterian Competition," American Economic Review, American Economic Association, vol. 67(1), pages 271-276, February.
    19. Sidney G. Winter, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(2), pages 237-261.
    20. Mary Tripsas, 1997. "Unraveling The Process Of Creative Destruction: Complementary Assets And Incumbent Survival In The Typesetter Industry," Strategic Management Journal, Wiley Blackwell, vol. 18(S1), pages 119-142, July.
    21. Linda Argote & Sara L. Beckman & Dennis Epple, 1990. "The Persistence and Transfer of Learning in Industrial Settings," Management Science, INFORMS, vol. 36(2), pages 140-154, February.
    22. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    23. Richard R. Nelson & Sidney G. Winter, 1978. "Forces Generating and Limiting Concentration under Schumpeterian Competition," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 524-548, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jerker Denrell & James G. March, 2001. "Adaptation as Information Restriction: The Hot Stove Effect," Organization Science, INFORMS, vol. 12(5), pages 523-538, October.
    2. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    3. Deishin Lee & Haim Mendelson, 2007. "Adoption of Information Technology Under Network Effects," Information Systems Research, INFORMS, vol. 18(4), pages 395-413, December.
    4. Heli Koski & Tobias Kretschmer, 2004. "Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 4(1), pages 5-31, March.
    5. Ewald Scherm & Christian Maaß, 2006. "Zum Stellenwert der Netzwerkökonomik in der Strategie-/Marketingforschung —Eine Analyse empirischer Untersuchungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 17(1), pages 27-46, March.
    6. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    7. Linda Argote & Sunkee Lee & Jisoo Park, 2021. "Organizational Learning Processes and Outcomes: Major Findings and Future Research Directions," Management Science, INFORMS, vol. 67(9), pages 5399-5429, September.
    8. Jeho Lee & Jaeyong Song & Jae-Suk Yang, 2016. "Network structure effects on incumbency advantage," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1632-1648, August.
    9. Narayanan, V.K. & Chen, Tianxu, 2012. "Research on technology standards: Accomplishment and challenges," Research Policy, Elsevier, vol. 41(8), pages 1375-1406.
    10. Eocman Lee & Jeho Lee & Jongseok Lee, 2006. "Reconsideration of the Winner-Take-All Hypothesis: Complex Networks and Local Bias," Management Science, INFORMS, vol. 52(12), pages 1838-1848, December.
    11. Schoder, Detlef, 2000. "Forecasting the success of telecommunication services in the presence of network effects," Information Economics and Policy, Elsevier, vol. 12(2), pages 181-200, June.
    12. Sangin Park, 2004. "Strategic Maneuvering and Standardization: Critical Advantage or Critical Mass?," Econometric Society 2004 Far Eastern Meetings 596, Econometric Society.
    13. Daniel P. Gross, 2020. "Collusive Investments in Technological Compatibility: Lessons from U.S. Railroads in the Late 19th Century," Management Science, INFORMS, vol. 66(12), pages 5683-5700, December.
    14. Schade, Sven & Buxmann, Peter, 2005. "A Prototype to Analyse and Support Standardization Decisions," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35795, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    15. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    16. June-Young Kim & Ji-Yub (Jay) Kim & Anne S. Miner, 2009. "Organizational Learning from Extreme Performance Experience: The Impact of Success and Recovery Experience," Organization Science, INFORMS, vol. 20(6), pages 958-978, December.
    17. Fabio Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 301-322.
    18. Chia‐Hui Chen & Junichiro Ishida, 2021. "A War of Attrition with Experimenting Players," Journal of Industrial Economics, Wiley Blackwell, vol. 69(2), pages 239-269, June.
    19. Joshua S. Gans & Michael Kearney & Erin L. Scott & Scott Stern, 2021. "Choosing Technology: An Entrepreneurial Strategy Approach," Strategy Science, INFORMS, vol. 6(1), pages 39-53, March.
    20. Liangjie Zhao & Wenqi Duan, 2014. "Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities," Computational Economics, Springer;Society for Computational Economics, vol. 43(1), pages 53-70, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:49:y:2003:i:4:p:553-570. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.