Making the Market: How Interoperability and Tipping Points Can Influence Network Size
by Scott Andes
New technology systems are increasingly being characterized by what are called “network externalities” where the value of certain technologies increases with additional users. Such externalities often imply the actual size of a network is below the socially optimal size. Networks are also characterized by market “tipping points.” Tipping points are points where the market shifts radically. Here, tipping points are the points when a given product has just enough customers to become a standard and dominate the market. The presence of tipping points has strong implications for the size and scope of innovation within a network. In this paper I argue interoperable networks—networks that allow open access to patented material—provide multiple tipping points within a network and therefore increase the size of the network and propensity for radical innovation. As such, intellectual property granted to products with network qualities should mandate licensing. In order to express the interplay between networks, tipping points and licensing within new technology systems, I draw from the example of mobile payment systems in Japan.