Chapter 16

Question 1

Network externalities

Answer 1

Situation whereby the benefit a consumer derives from owning a product increases when the number of other consumers increases

Direct network externalities arise when the different buyers from a network of users who communicate with each other

Indirect network externalities are when there are many users of something, so it is popular

Question 2

Estimating network effects

Answer 2

Time series data: we cannot be sure we are leaving out unobserved sources of correlation

Cross-section data: one limitation is that we may be measuring correlation, not a causality relation

Natural experiment: preferred approach by researchers

Question 3

Consumer expectations

Answer 3

Network effects may imply multiple demand levels for a given price. Which value takes place depends on consumers’ expectations regarding network size

Question 4

Excess inertia

Answer 4

A situation where new technology is not adopted even though it would be in most people’s interest to do so

Question 5

Excess momentum

Answer 5

A situation where a switch to new technology occurs even if most people would prefer it not to happen.

The opposite of excess inertia

Question 6

Bandwagon/domino effect/snowball effect

Answer 6

When network effects are so strong that a player has to go along with the other platey

Question 7

Forced upgrades

Answer 7

An example of excess momentum: software updates

Question 8

Path dependence

Answer 8

Standard economics models are a-historical: the equilibrium in a given industry, the value of firms, and so on, are determined by forces of long-run supply and demand

Question 9

Network externalities and equilibria

Answer 9

Network externalities may imply multiple potential equilibria, whereby an industry locks into one technology or another. Which technology ends up being chosen depends to a great extent on the actions of early adopters. The eventual winner need not be the superior or most-preferred technology

Question 10

Compatibility and firm strategy

Answer 10

If standard competition is very intense, then firms prefer compatibility. If product market competition is very intense, then firms prefer incompatibility.

Question 11

Splintering

Answer 11

When consumers become very confused about which standard to choose, this they prefer not to choose at all, which ends the war with 2 losers

Question 12

Backward compatibility

Answer 12

A related strategic choice is that of compatibility of a firm’s technology with previous versions of its technology

Barriers to entry: backward compatibility increases demand for the new Nintendo platform at the expense of rival platforms