The Economics of Network Industries.

• Author: Lambertini, Luca
• Position: Book Reviews

By Oz Shy.

Cambridge, UK: Cambridge University Press, 2001. Pp. xiii, 315. $64.95.

High-tech, telecommunication, broadcasting, and transport industries are characterized by network effects, whereby a consumer's utility from purchasing a good or service is positively related to the overall number of consumers who purchase the same good or service (or a compatible one). Some markets for information and the banking sector also share this essential feature. As soon as one does not confine attention to the specific field of industrial organization, one immediately realizes that network effects are pervasive throughout the whole financial system. The adoption of the euro by 12 European countries (and 300 million people) is just the most recent and noteworthy example of this kind. In light of these facts, it is not surprising that network externalities and the related issues of compatibility and standardization have been given a high priority in the microeconomist's research agenda over the last two decades.

In my view, Oz Shy's book represents the best single source for anyone wanting to get acquainted with the state of the art in this field today, since he is one of the prominent researchers in this area. The structure of the book consists of a vivid presentation of what a network industry is, complemented by the related welfare considerations. With particular regard to the latter aspect, Shy points out at the outset that one cannot expect a network industry to produce competitive outcomes. However, he also makes it unmistakably clear that the existence of market failures in such cases does not necessarily prompt regulatory intervention, which might make things even worse. Shy endorses this claim by referring to well-known real-world examples.

Shy proceeds to examine all of those industries for which network externalities operate by devoting a chapter to each one. Some of the issues investigated throughout the text will be completely familiar to the general reader. Software compatibility in the PC industry (Chapters 2 and 3) creates a large external benefit for any user, as anyone who remembers what it was like when Apple and IBM machines were still incompatible can tell. The World Wide Web is another example pertaining to the same industry (Chapter 7). The standardization of automated teller machines exerts similar effects in the banking industry by lowering, if not completely eliminating, transaction costs (Chapter 8).

Some other issues are...