Externalities occur whenever consumers feel an effect due to the presence of other consumers. To a large extent, the performance engineering of network services (such as wireless service provision, content delivery, etc.) is driven by the goal of mitigating negative externalities, such as congestion. However, ultimately, the value of many such services is driven by a positive externality: the value that consumers derive by being able to connect with other users of the service. In this research, models that help service providers evaluate the impact of positive externalities will be developed and analyzed. Models from the single service provider viewpoint will be considered first. Then the impact of positive externalities on firms in a competitive environment, noting that positive externalities create strong strategic complementarities between multiple service providers will be considered.
The models and insights this project intends to develop will have impact in networked service industries where positive externalities exist among consumers, including traditional network engineering, online gaming, Customer Relationship Management solutions, application service provision, etc. These models will not only provide guidance in pricing service for the consumer, but also guidance in how to form contractual agreements with other service providers to exploit complementarities. To enhance this impact, industrial synergies enabled through the Media X program at Stanford will be exploited. Also, the results developed here will be incorporated into graduate courses on revenue management and processing networks, as well as network economics.
