Reconsideration of the Winner-Take-All Hypothesis: Complex Networks and Local Bias

TLDR

Network‑effect literature posits that competition among incompatible technologies yields a winner‑take‑all outcome, with the installed base viewed as essential for firm survival. The study questions the winner‑take‑all hypothesis, asserting its validity depends on customer interaction patterns such as advice or file sharing. The authors model interaction networks where peer influence can lead customers to adopt lagging technologies even when a dominant installed base exists. Local bias in such networks sustains incompatible technologies, whereas its absence results in a single technology dominating the market, showing that overemphasizing installed base while ignoring network structure can mislead practitioners.

Abstract

The literature on network effects has popularized a hypothesis that competition between incompatible technologies results in the “winner-take-all” outcome. For the survival of the firm in this sort of competition, the installed base has been emphasized. We argue that the validity of this hypothesis depends on how customers interact with one another (e.g., if they exchange advice or files). In some interaction networks, customers influenced by their acquaintances may adopt a lagging technology even when a lead technology has built a large installed base. The presence of such a local bias facilitates the persistence of incompatibilities. When local bias cannot be sustained in other interaction networks, one technology corners the market. Our study suggests that overemphasizing the installed base, while ignoring network structure, could mislead practitioners.