Introduction

All of the work described in the preceding chapter, despite its obvious importance, only gives us part of the picture. All the behavior described there is demand-driven. For example, contagion effects imply that people who are involved in social interactions end up at corner equilibria. This implication is used, for example, by Becker in his (1996) model of addiction. A person enjoys a cigarette or a drug with his friends today. Tomorrow he wants to have more, partly because he had some yesterday, partly because his friends did, and he likes to do what they do. This escalates until he is addicted. But in this case, as in others, there is usually some attempt at a solution, that is to say, some attempt to form a group or structure or other form of organization or in some other way to endeavor to internalize the externality. In the case of smoking, for example, people who wish to stop may see a doctor, get Nicorette gum or the patch, or join a group to help them in this purpose, rather than just continue to hang out with their addicted friends and let the situation escalate.

With network externalities, property rights may help solve compatibility problems and investment problems in networks. For example, when there is a single owner of the network, that firm may be willing to sponsor the network by making investments in its growth that competitive hardware suppliers would not.

At the same time, these solutions seldom work perfectly.