Network Effects in the Security Software Market ∗

The market for security software has witnessed an unprecedented growth in recent years. A closer examination of this market reveals certain idiosyncrasies that are not observed in a traditional software market. For example, it is a highly competitive market involving many vendors. Yet, the market coverage seems relatively low. Prior research has not attempted to explain what makes this market different. In this paper, we develop a quantitative model to find possible answers to this question. Our model identifies a possible reason behind this behavior—that of a negative network effect, a phenomenon that has received considerable attention in the recent literature on application software security. Overall, our results highlight the unique nature of the security software market, furnish rigorous explanations for several counter-intuitive observations in the real world, and provide managerial insights for vendors on market competition.