The Evolution of Network Industries: Lessons from the Conquest of the Online Frontier, 1979–95

Abstract

In this paper we dissect the competitive dynamics of a network industry that has not been systematically studied in the past—the consumer‐oriented online networks of the pre‐1995 era. After briefly reconstructing the historical evolution of the industry we focus on a number of issues at the intersection of theory and data: the importance of direct and indirect network effects, tipping to a dominant player and the entry strategies adopted by two different waves of entrants. We also analyse price wars and the displacement of the leader in the first half of the 1990s. In the final section we focus on some remaining puzzles that suggest directions for further theoretical and empirical research.

Keywords:

• Network effects
• network industries
• consumer online networks

Acknowledgements

We thank the editor and three anonymous reviewers for extremely helpful comments on previous drafts of this paper. We acknowledge the superb research help of Sannu Shrestha, Kylie Canaday, and Marina Danilevsky, and financial support from Microsoft. All error are ours. The opinions expressed in this paper are exclusively ours and do not necessarily coincide with those of the institutions with which we are affiliated.

Notes

1. The Source had experimented with “low‐then‐high” in the early 1980s (The New York Times, 1980; The Wall Street Journal, 1980; Pollack, 1982).