Network externality and incentive to invest in network security

• Published in: Economic modelling 2014-01, Vol.36, p.398-404
• Main Authors: Liao, Chun-Hsiung, Chen, Chun-Wei
• Format: Article
• Language: English
• Subjects: Capital investments; Decision making; Externalities; Externality; Financial incentives; Game theory; Investment decision; Network externality; Network security; Network security investment; Online service firm; Probability; Self-protect rate; Studies; Survival probability
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2013.10.006

Breaches of network security can result in substantial losses for businesses. A game theory-based model is developed to investigate in the short run how network externality influences the optimal strategy of competing online firms producing homogenous services to invest in NS. A firm's self-protect rate and survival probability against NS security incidents differ depending on its related investment decisions. The incentive of a firm to invest in NS is derived, and the impact of the survival probability and the effect of the number of firms investing in NS on a firm's incentive to invest in NS are also analyzed. Policy implications drawn from the study are provided at the end the work. •We endogenize network externality in firm's decision of network security investments.•Network externality has opposing effects on firm's incentive to invest in NS.•The effectiveness of NS technology is positively incentive to NS investment.•Increasing the number of NS firms will increase the incentive to NS investment.