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It has now been 30 years since Jeffrey Rohlfs developed the concept of network externalities to explore how demand for a telecommunications service depends on the number of participants in the relevant network--such a service is more valuable to any user if there is a larger number of other users (J. Rohlfs. "A Theory of Interdependent Demand for a Communications Service." Bell Journal of Economics and Management Science 5, no. 1 [1974]: 16-37). Starting about ten years later, economists generally came to appreciate how network externalities give rise both to bandwagon effects in the adoption of specific techniques and to persisting lock-in of these techniques. Economists also noted how this analysis applies not only to networks based on a physical infrastructure but also to virtual networks, for which network effects arise because a larger number of users of some product (e.g., the Microsoft Windows operating system for personal computers, in contrast to Linux or the Apple Macintosh operating system) induce the greater provision of complementary goods or services (e.g., application software), which make the product more attractive. Some of the resulting literature has been synthesized in a three-article symposium in the Journal of Economic Perspectives (Spring 1994) and in several books, perhaps most notably Carl Shapiro and Hal R. Varians Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1999). Citations to Rohlfs's seminal article have rebounded more than once as a result.
Rohlfs's new contribution to this literature breaks little new ground, but it offers an excellent, accessible introduction to the concepts, basic analysis, and empirical studies related to network externalities. Two chapters introducing concepts are followed by three more that delve into demand- and supply-side issues, using a few simple diagrams and no equations. The bulk of the book is then taken up by case studies of fax technology, voice telephony before about 1917, the abortive picturephone of the early 1970s, compact-disc players, videocassette recorders (VCRs), personal computers, television from 1945 to the present, and the internet. Two concluding chapters summarize...