Leveraging Network Effects for Connected Products: Strategies and Implications for the Value Chain
Authors: Lu, Zhuoran; Dou, Yifan; Wu, D. J.; Chen, Jian
Journal: MIS Quarterly (2026)
<jats:p>This paper examines how a value chain can strategically harness network effects in connected products. We consider a representative two-tier value chain, in which a manufacturer sells a connected product through a retailer. Consumers derive both a stand-alone value and a network benefit, which increases with the size of the user base and the strength of the network effect. We investigate two strategies to effectively leverage these network effects. First, we analyze network expansion through seeding, which involves providing the product for free to a targeted group of consumers. Our analysis shows that when the production cost is sufficiently low, seeding arises in equilibrium and exhibits a “bang-bang” pattern, with either the manufacturer or the retailer exclusively undertaking seeding. Under strong network effects, the manufacturer can induce retailer seeding through a quantity-forcing contract with a wholesale discount, thereby replicating the centralized outcome in which both firms are integrated and act as a central planner. Next, we explore engineering network effects through investment. The decentralized value chain results in less efficient investment than the cen…