The Applicability of Network Effect Theory to Low-Cost Adoption Decisions: An Investigation of Peer-to-Peer File Sharing Technologies

The Applicability of Network Effect Theory to Low-Cost Adoption Decisions: An Investigation of Peer-to-Peer File Sharing Technologies

Jaeki Song (Texas Tech University, USA) and Eric A. Walden (Texas Tech University and Carnegie Mellon University, USA)
DOI: 10.4018/978-1-60566-154-4.ch017
OnDemand PDF Download:


In this work, we examined the boundary of the applicability of network effects theory. We theorized that when adoption is cheap, the cognitive demands of estimating network effects outweigh the benefit of making optimal adoption decisions. Thus, even in contexts where network effects do exist, we predict that adopters will use simple heuristics to make adoption decisions, if adoption is cheap. We propose that adopters simply do what they observe others doing. Using the context of peer-to-peer file sharing, we conducted three studies comparing network effects against simply following the behavior of others, and found in all three cases that there was no marginal effect of network size on willingness to adopt. However, when subjects were told classmates’ adoption choices, there was a strong marginal effect on willingness to adopt. Put simply, if people are offered the option of downloading a free peer-to-peer software, then changing the network size from 1,000 to 1,000,000 has no effect on their willingness to adopt, but having two classmates express a choice not to download the software, had a large negative impact on a subject’s willingness to download. Thus, our subjects, when faced with the option of a free download, did not behave in accordance with network effects theory, suggesting that there is a boundary on the applicability of the theory to internet adoption behavior.
Chapter Preview


Network effects theory is one of the bedrock theories of information systems (IS). We use the concept of network effects from our first undergraduate classes to our PhD seminars, from our executive education to our top research journals. However, the breadth of its applicability has been challenged by both academics (Liebowitz and Margolis 1994) and journalists (Useem 2001). The criticism can basically be stated as, “[c]ontrary to common misconceptions, network effects do not come about just because business is conducted on a network. (Liebowitz 2002 p. 4).” Thus, researchers have begun to ask, “in what sorts of environments do network effects occur?”

In this work, we try to address the boundary conditions of network effects from a cognitive perspective. We conceive of network effects as a special case of adoption decisions, and thus, focus on the cognitive processes of the decision maker. For network effects theory to be applicable, decision makers must incorporate the network effects into their decision processes. We argue that it does not always make sense to believe that decision makers do, or should, consider network effects when making an adoption decision, even if network effects are present. Specifically, we argue that if the costs of adoption are low—for example, free downloads, which characterizes a great deal of electronic commerce adoption, particularly P2P file-sharing applications—then it is not really worth the effort of the decision maker to consider all the facts. Thus, we ask the question, “Do individuals consider network effects when adoption costs are close to zero?”

We propose that decision makers use computationally simple heuristics to solve low cost adoption decisions. Specifically, we propose they use observational learning or imitation. If people around them choose to adopt a technology, then they choose to adopt the technology. Thus, our second research question is, “If decision makers do not consider the network effects, what should they consider?”

This approach fills an important niche in our understanding of network effects and its relationship to adoption. We follow the spirit of the Social-Economic-Psychological (SEP) model by considering that “…complex IT-driven phenomena … may involve a web of interdependencies related to constructs either purely of a social, economic, and psychological nature, or to constructs that lie at the interfaces between these areas. (Konana and Balasubramanian 2005 p. 508).” We do so by tying the information in the social and economic environment to the adopters’ cognitive costs of processing that information. Thus, it addresses the decision maker’s role in network effects, rather than just looking at the role of the environment. This is particularly salient for electronic commerce researchers, because so much of the adoption that occurs online is low-cost adoption, and network effect theory is applied to these adoption decisions (Kauffman and Walden 2001). If, as we propose, decision makers choose not to process the network effect information, then researchers need to be more cautious in applying network effect theory. Also, if we are correct, then we may be able to offer some explanation of adoption in the nascent stages of a network’s growth. Finally, our study suggests that wide-scale adoption may be an emergent result of local phenomena, and that small scale adoption patterns may be quite different than those observed at the global level and predicted by network effect theory.

We perform a series of four experiments aimed at understanding how network effects and observational learning affect P2P adoption decisions. We find that observational learning has a very strong impact on people’s willingness to adopt a P2P technology. However, network effects have little effect. We attribute this to individuals’ difficulty in determining how many users a P2P technology needs to make it worth the effort of adopting.

Complete Chapter List

Search this Book:
International Advisory Board
Table of Contents
In Lee
Chapter 1
Keith F. Ward, Erik Rolland, Raymond A. Patterson
Proponents of Customer Relationship Management (CRM) suggest that a firm can develop a value creation relationship, such that an increase in... Sample PDF
Managing the Customer Relationship: A Framework for E-CRM Analysis
Chapter 2
Soumaya Ben Letaifa
This chapter examines how e-CRM has affected both organizational and individual behavior in a leading Canadian bank. The innovative and... Sample PDF
A New Conceptual Framework for Greater Success with Integration of E-CRM
Chapter 3
Tim Coltman
Most sectors of industry, commerce, and government have reported variation in the performance payoff from electronic customer relationship... Sample PDF
Managerial Discretion and E-CRM Performance
Chapter 4
Patricia T. Warrington, Elizabeth Gangstad, Richard Feinberg, Ko de Ruyter
Multi-channel retailers that utilize an e-CRM approach stand to benefit in multiple arenas by providing targeted customer service as well as gaining... Sample PDF
Multi-Channel Retailing and Customer Satisfaction: Implications for E-CRM
Chapter 5
Veronica Liljander, Pia Polsa, Kim Forsberg
Not until very recently has mobile phone technology become sophisticated enough to allow more complex customized programs, which enable companies to... Sample PDF
Do Mobile CRM Services Appeal to Loyalty Program Customers?
Chapter 6
Michael Shumanov
While the managerial rationale for adopting customer relationship management (CRM) has been fairly well articulated in the literature, research on... Sample PDF
Developing a Global CRM Strategy
Chapter 7
John Gallaugher
This article synthesizes and leverages two strategic frameworks when analyzing the true nature of strategy and the Internet: (1) the concept of... Sample PDF
Strategic Positioning and Resource-Based Thinking: Cutting Through the Haze of Punditry to Understand Factors Behind Sustainable, Successful Internet Businesses
Chapter 8
Savvas Papagiannidis
This chapter covers the concept of e-business models and how they relate to the music video and television environments. After identifying the value... Sample PDF
A Tale of E-Business Models: From the Music to the Television Industry
Chapter 9
Kirill M. Yurov
Healthcare technology markets have been recently identified as potential investment targets. Having survived a major environmental shock, the... Sample PDF
Strategic Maneuvering in Healthcare Technology Markets: The Case of Emdeon Corporation
Chapter 10
Olli Kuivalainen
The aim of this chapter is to provide a holistic exploration of the development of the business model of a magazine Web site, and of the factors... Sample PDF
Complementary Role of Website in Business Model Development
Chapter 11
Tobias Kollmann is a German B2C platform for different kinds of service and handcraft orders. Based on the concept of reverse auctions, demanders... Sample PDF
A Reverse Auction-Based E-Business Model for B2C Service Markets
Chapter 12
Denis Caro
The 21st century continues to witness the transformation of organizational systems globally through the deployment of Information and Communication... Sample PDF
Evolving E-Health Systems: Symbiotic Constructs Between Corporate and E-Healthcare Worlds in International Space
Chapter 13
Karl Knapp, Sushil K. Sharma, Kevin King
Offshore information technology (IT) outsourcing has been becoming mainstream alternative to inhouse operations. While offshore development is a... Sample PDF
Socio-Economic Impacts of Offshore Outsourcing of Information Technology
Chapter 14
Indrit Troshani
The eXtensible Business Reporting Language (XBRL) is an emerging XML-based standard which has the potential to significantly improve the efficiency... Sample PDF
Towards Theory Development for Emergent E-Business Innovations: Using Convergent Interviewing to Explore the Adoption of XBRL in Australia
Chapter 15
Bill Vassiliadis
Copyright protection is becoming an important issue for organizations that create, use, and distribute digital content through e-commerce channels.... Sample PDF
An Introduction to the Management and Protection of Intellectual Property Rights
Chapter 16
Tagelsir Mohamed Gasmelseid
The unprecedented advancements witnessed in the field of information and communication technology over the last couple of years are significantly... Sample PDF
Intelligent Contracting: An E-Supply Chain Management Perspective
Chapter 17
Jaeki Song, Eric A. Walden
In this work, we examined the boundary of the applicability of network effects theory. We theorized that when adoption is cheap, the cognitive... Sample PDF
The Applicability of Network Effect Theory to Low-Cost Adoption Decisions: An Investigation of Peer-to-Peer File Sharing Technologies
Chapter 18
Wen-Jang Jih
Two mutually reinforcing forces currently are at work to propel an upward spiraling in the business arena. As wireless communication technology... Sample PDF
An Empirical Analysis of Cellular Phone Users' Convenience Perception and Its Impact on Shopping Intention in Mobile Commerce
Chapter 19
Fang He
Along with the exponential increase in online business transactions, the online payment system has gained in popularity because vendors and... Sample PDF
The Effects of System Features, Perceived Risk and Benefit, and Customer Characteristics on Online Bill Paying
About the Contributors