Robert J. Kauffman and Ajay Kumar

[Full Paper in pdf]

The analysis of externalities in technology-based networks continues to be of significant mana-gerial importance in e-commerce and traditional IS operations. Competitive strategy, economics and IS researchers share this interest, and have been exploring technology adoption, development and product launch contexts where understanding the issues is critical. We examine three levels of analysis in which positive demand-side and negative congestion externalities act as counter-vailing drivers of business value: the market or economy level, the business process or firm lev-el, and the individual or product level. We develop game-theoretic deterministic expected-value models to analyze countervailing network externalities, and illustrate their application in several real world settings. We further illustrate how managerial decision-making can be enriched using real options analysis in contexts involving dynamic countervailing externalities.

KEYWORDS: Congestion, countervailing externalities, decision-making under uncertainty, game theory, IT value, network externalities, real options, stochastic benefits and costs