03. Network Effects

Question 1

When do direct network effects arise?

Answer 1

• when in a communication system users derive value from the presence of other users
• valze to customers increaes with number of customers (positive economic externality)

Question 2

What is metcalfes law?

Answer 2

the value of a network is proportional to the square of its size
(V = S^2)

Question 3

when do indirect network effects arise?

Answer 3

• when as user i dont care about presence of other users, but i care about complementary goods such as content
• e.g. choosing between android or iphone you think about the application and decide which you like more
• but the other users still benefit me

Question 4

what are two things that might arise?

Answer 4

• critical mass becomes important for the product to take of in market place
• creates market that is likely o tip, ie. one might dissapear but one might rise

Question 5

Network effects on their own are not sufficient to sustain market power. In addition, (1) must exist to keep customers.

Answer 5

switching costs

all cost (monetary, time, psychological) a consumer incurrs when switching from one service or product to another

Question 6

Examples for positive network externalities

1.
2.

Answer 6

• lower search costs
• easy and safe transactions (eg feedback rating system of ebay)

Question 7

Different Types of network effects?

1.
2.
3.
4.
5.

Answer 7

1. personal direct network effect (eg many users)
2. bandwagon network effect: people fear being left out; placing more value as soon as more people use it
3. 2-sided-platform network effect (facebook platform introduced to build web apps on facebooks social graph) and 2-sided (media) marketplace NW effects: users (supply) and advertisers (demand)
4. data network effect ( additional usage of products yields data, which in turn increases he value of the product)
5. persomal utility network effect (e.g. facebook messengers; users personal identities are tied to the network in question)

Question 8

2-sided platform network effect

Answer 8

• two sets of agents interact through an intermediary or platform and each set of agents affect the outcomes of the other agent

Question 9

Decide whether the following are aspects of indirect network effects.

1. Occurs when complementary products and services and offered.
2. Can be descirbed as “the value of a network service increases with the number of users”
3. Can be described with many examples, one being game consoles and games.
4. Does NOT occur when the benefits of the original good are enhanced by offering subsitute products.
5. Occurs when a person places greater value on a good as more and more other people possess it.

Answer 9

1. correct
2. wrong
3. correct
4. correct
5. wrong