Testing Metcalfe's Law : Pitfalls and Possibilities

A small but burgeoning literature tries to assess whether Metcalfe's law provides a realistic yardstick for the value of specific types of networks. This paper uncovers a number of flaws in the extant tests. Specifically, I point out that a proper test of Metcalfe's law – or of any of the competing ‘laws' – requires a correct identification of the type(s) of network effects involved, as well as of the relevant market(s). I also argue that a multi-market setting typically calls for the scaling of network sizes and that one may need to control for changes in network quality over time. Finally, one should not mix up indicators at the individual and aggregate level. Armed with these insights, I re-examine Madureira et al. (2013)'s results. Unlike Madureira et al., I find that Metcalfe's law fits the data better than Briscoe's law