Abstract
This paper examines emerging industries that exhibit positive network effects. We put forward a dynamic model in which two technologies compete to be the standard. The model provides a quantitative method for the valuation of firms. We use the model to examine the relationship between network effects, consumer heterogeneity, and prices. We show that the firm value depends strongly on the particular choice of the network strength function. We compare three types of such functions, identify shortcomings of traditionally used ones, and propose a more realistic one.
