NET Institute* www.NETinst.org Working Paper #06-12 September 2006 Network Effects, Switching Costs, and Underlying Preferences in Operating Systems for Servers: A Case of Linux vs. Windows Seung-Hyun Hong University of Illinois and Leonardo Rezende PUC-Rio and University of Illinois * The Networks, Electronic Commerce, and Telecommunications (“NET”) Institute, http://www.NETinst.org, is a non-profit institution devoted to research on network industries, electronic commerce, telecommunications, the Internet, “virtual networks” comprised of computers that share the same technical standard or operating system, and on network issues in general. Network Effects, Switching Costs, and Underlying Preferences in Operating Systems for Servers: A Case of Linux vs. Windows∗ Seung-Hyun Hong Leonardo Rezende Department of Economics Department of Economics University of Illinois PUC-Rio and University of Illinois
[email protected] [email protected] September 30, 2006 Abstract We seek to investigate to what extent network effects and switching costs affect the decision to adopt Linux or Windows as the operating system for computer servers. To this end, we use detailed survey data of over 100,000 establishments in the United States. To account for unobserved preferences for either operating system, we employ recently developed dynamic discrete choice panel data methods (Arellano and Carrasco 2003). The results from our empirical analysis suggest that among network effects, switching costs, and unobserved preferences, the last two are important factors in the market for operating systems for servers. We find that switching costs are significant, but can be severely overestimated by methods that do not account for unobserved heterogeneity in establishment-specific tastes for operating systems.