Network Externalities and Supply Curves
Because prices of telecommunications and Internet services have fallen rapidly, it is tempting to argue that the presence of network externalities in these industries gives their long-run supply curves a negative slope. Falling prices just reflect movement along this supply curve as demand expands. Unfortunately, This analysis is unconvincing because the benefits of network externalities accrue largely to demanders, 2 not do supplier, in terms of lower input costs. Yes, input prices for telecommunications have also been falling because of technical progress, but this effect is largely independent of network externalities. The prices of computers and digital watches have also been falling without reliance on significant network effect.
Economists remain undecided about the effect of network externalities on markets—especially about their impact on competition. The issue seems to be whether a firm can manage to appropriate some of the benefits of network externalities open the way for greater competition (as seems to the case in telephone long-distance service). Developing models that differentiate between these two cases is an important area of economic research.