The Evolution of Dominant Market Shares: The Role of Network Effects

This research uses simulation models to examine how dominant market shares can arise from network effects, which occur when the utility a consumer receives from a product is affected by whether others are using the same product. We demonstrate that network effects can have a substantial impact on the evolution of market share, but that the impact is sensitive to a firm’s initial position and the consumer decision-making process. We also examine the merits of investing in product quality versus investing in early acquisition of market share in markets influenced by network effects, and how arguably inferior products may dominate markets.