China’s network
industry
75
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 1 No. 1, 2008
pp. 75-87
# Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544400810854513
Market structure of China’s
network industry
Lifang Zhang and Minghong Zhang
School of Economics, Xiamen University, Fujian, People’s Republic of China
Abstract
Purpose – This paper aims to study network effects and the impacts on market structure in the
specific context of China’s network industries.
Design/methodology/approach – This paper is organized in the mode of ‘‘concept-model analysis-
empirical examination’’. Starting from the concept of ‘‘network effect’’, it is then extended to the
theoretical analysis of market structure and the examination of China’s representative network
industries.
Findings – The data for China’s representative network industries produce mixed findings. Some
prove the theoretical estimation quite well, while others do not follow the theoretical conclusion so
closely.
Research limitations/implications – The data for China’s network industry are relatively limited.
The depth of the data is especially inadequate, which prevents more systematic econometrical
analysis.
Practical implications – The paper can serve as a reference for private decision makers of network
industries and for regulators with antitrust concerns.
Originality/value – This paper may be the first of its kind to study the market structure of China’s
network industries from the perspective of network effects theory. It could be a good reference for
those interested in learning the current status of China’s network industries.
Keywords China, Economic sectors, Operating systems, Portals, Online operations, Search engines
Paper type Research paper
1. Introduction
1.1 Network industry
With the progress of technology in recent decades, the network industry has become
more prominent in our modern life and has made significant contributions to the fast
economic development in many countries. Typical network industries include
telecommunication and internet-related industries. Among them, telephones, fax
machines and emails are typical network products we often see in network economics
literatures (Shapiro and Varian, 1999).
We witness some outstanding features of the network industry since its emergence,
such as fast expansion, uneven market share, lock-in and path dependence
(Economides, 2004). Generally speaking, the pace of market penetration is much faster
in network industries than in non-network industries. It is common for firms of non-
network industries to take several decades to achieve the dominant position in the
market while we see companies like Microsoft and Google become the market
dominators in just a decade or less. Meanwhile, many network industries exhibit
increasing returns to scale in production: average cost decreases with increasing scales
of production.
1.2 Network effect
Network effect is commonly defined as the increasing utility that a user derives from
consumption of a product as the number of other users who consume the same product
increases (Katz and Shapiro, 1985). In a broader sense, a network effect is the increase
in the net value of an action that occurs as the number of agents taking equivalent
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