Death through Success: The Rise and Fall of Local Service Competition at the Turn of the Century

Working paper400 KB


This paper develops a model of delayed network effects to explore the curious dynamics of competition in the local telephone market between AT\&T and the 'Independents' at the turn of the century. In the early years of telephone diffusion, local service competition between these two non-interconnected networks became widespread, but declined rapidly when diffusion rates started to slow down after 1907. The analysis is based on the observation that urban markets subdivide into social 'islands' along geographical and socio-economic dimensions: users are more likely to communicate with subscribers 'inside' their island than with those 'outside' it. A simple dynamic model demonstrates how minority networks can thrive and preserve their market share at a low state of development when islands form essentially independent niche markets. As the industry matures, these niches 'grow' together and standardization occurs. The implications of the model are confirmed using a small panel data set of US cities.

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Last updated on 04/29/2018