DRAFT COMMENTS WELCOME An Empirical Analysis of Network Externalities in Peer-To-Peer Music-Sharing Networks

Peer-to-peer file sharing networks are becoming an important medium for the distribution of information goods. However, there is little academic research into the optimal design of these networks under real-world conditions. Our research represents an initial effort to analyze the impact of positive and negative network externalities on the optimal size of these P2P networks. Our analysis uses a unique dataset collected from the six most popular OpenNap peer-to-peer networks between December 19, 2000 and April 22, 2001. We find that users contribute value to the network in terms of additional content and additional replicas of content at a diminishing rate, while they impose costs on the network in terms of congestion on shared resources at an increasing rate. Together these results suggest that the optimal size of these centralized peer-to-peer networks is bounded — at some point the costs a marginal user imposes on the network will exceed the value they provide.