NETWORK EFFECTS AND THE ADOPTION OF NEW TECHNOLOGY - EVIDENCE FROM THE US TELECOMMUNICATIONS INDUSTRY

This paper examines variations in the adoption of new technology by fi rms operating in a network-based industry: telecommunications. These v ariations are explained as a function of three network effects: the fi rst is the conversion effect, driven by operations-related increasing returns to scale; the second is the consumption effect; driven by dema nd-side increasing returns to scale; the third is an imitative effect. We expect the conversion effect to be felt more strongly during earli er phases of a technology's evolution, while a strong consumption effe ct is felt throughout. The imitative effect is also expected to be fel t throughout. These hypotheses are examined with respect to electronic switching adoption in the local operating sector of the U.S. telecomm unications industry. An analysis of the variations in adoption levels of the 40 largest firms over a period lusting from 1973 to 1987 suppor ts our expectations, except for the imitative effect. (C) 1998 John Wi ley & Sons, Ltd.