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The concept of network externalities in the Telecommunications/ICT industry. It covers the overview of externalities, positive and negative effects, network externalities in the industry, sources, economic impact, and solutions. The document also includes examples of network externalities in the industry and attempts to harmonize them worldwide.
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Raynold C. Mfungahema Director, Consumer and Industry Affairs
Tanzania Communications Regulatory Authority
ITU Workshop on “Apportionment of Revenues and International Internet Connectivity” (Geneva, Switzerland, 23-24 January 2012)
Introduction Overview of the NE Concept
Positive effects
Negative Effects Convergence of Telecom services and NE
Economic impact of NE
Private and Public solutions to Externalities Mechanism to Harmonize NE world wide
Development of Annex 1 to Recommendation D156 on NE
Conclusions and Recommandations
u When a market outcome affects parties other than the buyers and sellers, side- effects are created
u These effects are called Externalities.
u Externalities can either be positive or negative.
u Externalities cause markets outcomes to be inefficient u Incorrect prices and production
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Arise because there is no market price attached to the activity Can be produced by people or firms Can be Good (positive) or Bad (negative) Public goods are special case Positive externality’s full effects are felt by everyone in the economy
Geneva, Switzerland, 23-24 January 2012
When an externality imposes costs on third party bystanders, a negative externality exists.
The complete (or social) costs of production are greater than the private cost to producers and consumers. Pollution is the classical example of Negative externality.
In Economics and Business, a network externality (also called network effect) is the effect that one user of a good or service has on the value of the product to other people.
Network Externality means that there are benefits if many people join and use a network. The term was coined by Jeff Rohlfs (1974) once at the Bells Labs.
The classic example is the telephone. The more people own telephones, the more Geneva, Switzerland, 23-24 January 2012 valuable the telephone is to each owner. 8
This is the desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad. This is the major objective of marketing and advertising campaigns (e.g. toys, clothing).
If the network externality is negative, a snob effect exists.
There are two basic ways in which such
Direct network externalities exist when an increase in the size of the a network increases the number of others with whom one can
Indirect network externalities exist when an increase in the size of the network expands the range of complementary products available to the members of the
The word “ externalities” in economics refer to costs or benefits that fall outside an activity under consideration. If all costs and benefits can be charged to the activity that creates them, the market will produce an optimal allocation of resources. The externalities are considered as one of the types of market failures.
Poor quality product Inflated prices Under provision (over provision) Consumer safety concerns Poor service (not enough support staff to service demand)
u When private parties cannot adequately deal with externalities, then the government steps in. u The government can either regulate behavior or internalize the externality by using Pigovian taxes.
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It is notable that some attempts has been made to include a Network externality Surcharge (NES) A factor considered/included when determining Cost based termination charges Some examples: UK 2003, Australia 2004 Tanzania 2004 and 2007 At Global level: ITU-T SG 3(2003) established a rapporteur group Questionnaire on NE circulated in 2006 Workshop on NE 2007 Recommendation D.156 on NE WTSA 2008 Joburg.
