B: Network Effects Flashcards
Definition Network Effects
Simply put, networks effects occur when a product or service becomes more valuable to its users as more people use it.
What are four areas for Network Effects?
Social Networks
Communication Protocols
Ecosystems and Standards
Marketplaces and Matching
What are five key properties/challenges i.o. to achieve network effects?
Critical Mass (Product/Platform launch)
Winner-takes-it-all dynamics
Natural drift towards monopolies (anti competitive tendencies)
Lock-in effects
Direct vs indirect effects
definition positive network effects
The more users, the higher the individual’s utility (demand side scale effects)
What does Metcalfe’s Law state?
The value of a telecommunicationsnetwork is proportional to the square of the number of users of the system(n2).
Does the value to each user increase exponentially with more connections?
No. For each user, the value added to the network increases linear. To the overall network, the value is indeed exponentially dependend.
Sarnoff’s Law;
The value of the network is proportional to the number of its members (n)
Reed’s Law:
The value of the network is proportional to the number of possible subgroups of any size (2^n).
How to calculate the value of a network to it’s individual users?
(Nutzen des Gesamtnetzwerkes)/(Anzahl Teilnehmer)
What are the three equilibria of a network market? Explain the tendencies of initial expectations. (Pinguin-Effekt)
Low (L)
For initial expectations between Land C, demand convergences towards L.
Critical (C)
For initial expectations between Cand H, demand convergences towards H.
High (H)
For initial expectations above H,demand convergences (back) to H.
The equilibria L and Hare stable: for small deviations, demand always tends to converge back.
The equilibrium Cis instable: smallest deviation will result in convergence towards H or L.
Definition / Difference between direct and indirect network effects:
Direct: A product‘s value increases due to the possibility of direct interactions with other consumers
Indirect: Increasing numbers of consumers yield complementary utility, which in turn increases the value of product
What are four examples of demand stimulation strategies?
Selling the product at prices below its production costs
Massive initial marketing
Starting locally
Generate, buy, or simulate activity
