Substitutes, Complements and Network Effects in Instant Messaging Services

Discerning the behavior and the mechanisms underlying network effects remains an elusive but economically important research objective. This research provides insight into these mechanisms through an investigation of the growth of network effects, and their modulation through substitutes and complementary services offered by China Mobile. Our research shows that network effects can be perceived as a manifestation of the consumer adoption life cycle behaviors, and that contagion models provide an accurate description of the mechanism underlying network effects. In the period under study, China Mobile’s customers adopted personal computer base instant messaging at a declining rate, abandoning it due to cannibalization by competitor services. In contrast short message service instant messaging on low cost platforms demonstrated the strongest network effects and traditional early adoption ‘innovation’ consumer behavior was unimportant in defining China Mobile’s instant messaging markets. In those markets, network effects arose from growth of the own service network, but were strongly influenced by cannibalization from network effects from close substitutes or complements. The research develops an accurate causal model of the impact of network size on network adoption rate. The model of network effects, complements and substitutes presented in this paper can be used to predict specific consequences of managerial decisions to increase network size through promotions, merging and acquisition of networks.