Chapter 11 - Path Dependence

Question 1

What is negative feedback?

Answer 1

It is a type of market feedback which reduced any deviation from the market equilibrium, until it is reached.

Question 2

Explain the concept of path dependence.

Answer 2

It is the market situations where several equilibrium states can be found, due to the effect of positive feedbacks. The path of evolution of the goods depends on:
1. Initial conditions of the market
2. network effects
3. external events (product visibility and searching costs)

Question 3

Give one example for external forces and one for internal forces.

Answer 3

• External: better product visibility and availability in retail shops
• Internal: positive feedback driving positive network effects, like bandwagon effects, where imitators follow new adopters.

Question 4

Which is the theoretical end result of a market subject to path dependence (positive feedback)?

Answer 4

The final result tends to an equilibrium point. Generally, since the final situation can be referred to as winner-takes-all, there are as many equilibrium points as potential winners, so competitors.

Question 5

What is the equilibrium state in the advertising market in the competition between Google and Facebook?

Answer 5

It depends on the number of users in Facebook and the number of people using Google search engine.

Question 6

What advantages brought the Panasonic VHS to win the competition against Betamax?

Answer 6

1. Better features (record 3h in a single cassette)
2. External event: more visibility in shops
3. Positive network effects from users and film producers.

Question 7

What is the specific term to define the switching between value networks performed by users?

Answer 7

Churning