Network Externalities in the Operating System Market

Kenneth Arrow describes why the operating system market is a textbook case of a market characterized by positive network externalities:

The value of the operating system is in its capability to run application software. The larger the installed base of a particular operating system, the more likely it is that independent software vendors will write programs that run on that operating system, and, in this circular fashion, the more valuable the operating system will be to consumers.

The Department of Justice agrees. In their Competitive Impact Statment relating to the proposed Final Judgment on the Microsoft antitrust case, the Department describes the high barriers to entry in the operating system market:

Development, testing, and marketing of a new PC operating system involves considerable time and expense. A new operating system faces additional barriers to entry, including the absence of a variety of high quality applications to run on the system; the small number of people trained on and using the system, which discourages customers from buying it and software companies from writing applications to run on it; and, since the overwhelming majority of PCs are sold with a pre-installed operating system, the difficulty of convincing OEMs to offer and promote the system.