New York Computer Science & Economics Day, Nov 9, 2009

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Dynamics of Network Technology Competition

The Role of Gateways

Soumya Sen

Dept. Elec. & Sys. EngUniversity of Pennsylvania

Technical Report: “Modeling the dynamics of network technology adoption and the role of converters”, http://repository.upenn.edu/ese_papers/496/

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Acknowledgements• Joint work with:

Youngmi Jin (Penn, ESE)Roch Guerin (Penn, ESE) Kartik Hosanagar (Penn, Wharton)

• In collaboration with:Andrew Odlyzko (U. Minn)Zhi-Li Zhang (U. Minn)

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One (out of many) Motivating Example• Two competing video-conf service offerings

• Incumbent: Low-def video (has low quality, low price)• Entrant: High-def (has high quality, high price)

• Technology characteristics• User value depends on who they can reach

– Higher externality benefits for High-def than for Low-def• Gateways/converters can allow inter-operability with some limitations

– Simplex, asymmetric, unconstrained» Asymmetric: encoding is hard, decoding is easy» Low-def subscribers can display high-def signals but not generate them

• Modeling the evolution and outcome of technology competition

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Model• Users individually continuously evaluate their technology choice

• Decision based on technology utility

Technology 1: U1(,x1,x2 ) = q1+(x1+α1β x2) – p1

Technology 2: U2(,x1,x2) = q2+(βx2+α2x1) – p2

• User decisions are rational (but myopic – based on current adoption)– No technology if U1< 0, U2< 0

– Technology 1 if U1> 0, U1> U2

– Technology 2 if U2> 0, U1< U2

• Adoption dynamics can be captured with a standard diffusion model– Main complexity is keeping track of combinations of decision regions

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What can this model achieve?

• Identify feasible combinations of possible equilibria

• Characterize diffusion trajectories

• Insight into possible adoption patterns can be extracted from the solution

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Key Findings• Gateways can introduce instabilities

(“boom and bust” cycles)• Impossible without gateways

• Gateways create unpredictable outcomes• Allow inferior technologies to persist• Can hurt or help the incumbent• Can hurt or help overall market penetration

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Example 1: “Boom & bust Cycles”(From Stable to Unstable- Asymmetric Gateways)

• As the efficiency of Tech. 1 gateway increases, system goes from dominance of Tech. 2 to a system with no stable state– No stable equilibrium for 1=1 and 2=0

x1: Fraction of Technology 1 adopters, x2: Fraction of Technology 2 adopters

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Example 2: Hurting Overall Market (Asymmetric Gateways – Entrant)

• Tech. 2 fails to gain market share without gateways• Tech. 2 introduces gateways of increasing efficiency

– Tech. 2 gains market share, but at the cost of a lower overall market penetration