NCPA - Daily Policy Digest - "Lock-In" Failure in E-Commerce

NATIONAL CENTER FOR POLICY ANALYSIS
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"Lock-In" Failure in E-Commerce

In the late 1990s, a new theory of e-commerce claimed that enhanced economies of scale give a decisive advantage to those who get new technology to the market first, even if later technologies prove to be superior. A new book, "Re-Thinking the Network Economy," by economist Stan Liebowitz, explains why the theory was wrong.

According to the theory, Internet lock-in happens because of network effects. A network effect occurs when the value of a product to consumers increases with the popularity of the product. For example, a telephone increases in usefulness as more people purchase them and has little value if few people use them. Consequently, the firm that gains a big share of the market first will be protected from competition from late-movers.

Liebowitz claims that there are two kinds of lock-in: strong and weak.

Weak lock-in arises simply because switching to a new product is costly; for example, people do not buy a new computer every three months even though the product is improving all the time.

In contrast, strong lock-in means that consumer won't move to a new, superior product unless other jump first.

If consumers could somehow agree to move together, they would be better off, but they cannot agree.

However, Liebowitz argues that there is no evidence of strong lock-ins. He finds that if a clearly superior technology enters the market, consumers will shift to the new technology. Moreover, they can depend on others to do the same. In this way, even where network effects apply, a sufficient margin of improvement achieves the necessary coordination among consumers.

Thus, there are weak lock-in effects in e-commerce.

Source: "First will be last," Economist, September 26, 2002; based on Stan Liebowitz, "Re-Thinking the Network Economy: The True Forces That Drive the Digital Marketplace," (New York City: American Management Association (Amacom), September 2002).

For more on the "Re-Thinking the Network Economy":
http://www.amazon.com/exec/obidos/
tg/detail/-/0814406491/qid=1033342423/sr=8-3/
ref=sr_8_3/104-1431604-0399149?v=glance

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