Network effects and the adoption of new technology: evidence from the U.S. telecommunications industry

TLDR

Technology adoption in telecom firms is driven by three network effects: conversion, consumption, and imitation. The study investigates how conversion, consumption, and imitation effects shape the adoption of electronic switching technology among telecom firms. The authors analyze electronic switching adoption by the 40 largest U.S. telecom firms from 1973 to 1987. Results confirm the predicted roles of conversion and consumption effects, but find no evidence for an imitation effect.

Abstract

This paper examines variations in the adoption of new technology by firms operating in a network-based industry: telecommunications. These variations are explained as a function of three network effects: the first is the conversion effect, driven by operations-related increasing returns to scale; the second is the consumption effect, driven by demand-side increasing returns to scale; the third is an imitative effect. We expect the conversion effect to be felt more strongly during earlier phases of a technology's evolution, while a strong consumption effect is felt throughout. The imitative effect is also expected to be felt throughout. These hypotheses are examined with respect to electronic switching adoption in the local operating sector of the U.S. telecommunications industry. An analysis of the variations in adoption levels of the 40 largest firms over a period lasting from 1973 to 1987 supports our expectations, except for the imitative effect. © 1998 John Wiley & Sons, Ltd.