Network Externalities and Real Option Evaluation

THE ECONOMICS OF ONLINE MARKET AND ICT NETWORKS, R. Cooper, G. Madden, A. Lloyd and M. Schipp, eds., Physica-Verlag, May 2006

16 Pages Posted: 13 Feb 2011

See all articles by Jean-Michel Sahut

Jean-Michel Sahut

IDRAC Business School

Nadine Bellamy

Université d'Évry - Equipe d'Analyse et Probabilites

Date Written: 2006

Abstract

This paper provides a conceptual framework to analyze investment projects with networks externalities. In the presence of such effects, consumers make their choice of consumption according to the number of people having already adopted the product or the service. The process of diffusion of such products or services results then in a S-curve when they are successful. The integration of these effects has to be taken into account in the evaluation investment projects because they deeply modify the structure of the cash-flows and thus hoped pro…tability. We develop a model to evaluate investment project with networks effects where the capital expenses depend on the number of users which follows a random process with a S-curve trend. Moreover, the project can be canceled at any time. The model suggested integrates this possibility through a real option approach, and discusses the project canceling parameters.

Keywords: investment, externality, network effect, IT, project evaluation, real option, NPV

JEL Classification: C65, D81, G31

Suggested Citation

Sahut, Jean-Michel and Bellamy, Nadine, Network Externalities and Real Option Evaluation (2006). THE ECONOMICS OF ONLINE MARKET AND ICT NETWORKS, R. Cooper, G. Madden, A. Lloyd and M. Schipp, eds., Physica-Verlag, May 2006, Available at SSRN: https://ssrn.com/abstract=1760384

Jean-Michel Sahut (Contact Author)

IDRAC Business School

47 rue du Sergent Michel Berthet
Lyon, 69009
France

Nadine Bellamy

Université d'Évry - Equipe d'Analyse et Probabilites ( email )

Boulevard des Coquibus
F-91025 Evry Cedex
France

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