An empirical assessment of the impact of network effects on competitive processes in the operating systems market

Abstract

Modern technology markets are characterized by the presence of a network effect, a phenomenon that significantly affects network adoption. While providing the advantage of belonging to a network, network effects can curb the diffusion of alternative technological products, which can negatively influence public welfare. The purpose of this article is to work out a method of a compound impact analysis of direct network effect, critical mass and standardization when assessing changes in the competitive environment on a two-sided software market using the case of operating systems (OS). The theory of network effects constitutes the methodological framework of the study. The research method is an econometric analysis of the impact of the installed base of users, switch of standards and gain of a critical mass of users by applying a basic within model and a difference GMM model. The database consists of monthly country data on website visitors’ activity from the StatCounter web analytics service by desktop, mobile, and tablet devices for the period from 2009 to 2019. The study shows that, due to the saturation effect, markets experience a slowdown in the influence of network effects. The desktop OS market is characterized by the presence of a de facto standard, that is Windows OS, which indicates the monopolization of this segment. OSX, Android, and iOS are industrywide standards. The proposed approach allows analyzing a direct network effect jointly with gain of a critical mass of users and switch of standards.

Keywords

• two-sided markets
• network effects
• direct network effect
• critical mass
• installed base
• standardization
• operating system
• competition