Industrial Economics

Question 1

What does Chiang say about network goods?

Answer 1

• The type of network (physical, social, virtual) has different implications on demand
• Increasing the value of the good with more people using it causes a Virtuous Cycle
• Network demand has a ∩ shaped curve
• Network goods mean that demand curve increases at a diminishing rate as supply increases
• Network goods tend to create winners and losers in the industry
• Firms utilise teaser and lock-in strategies to gain market share and reduce the amount of people who can leave

Question 2

What does Leiponen say about Network Effects?

Answer 2

• Network Effects are users deriving value from other users on the network
• Metcalfe’s law says the value of the network is proportional to the square of its size
• Network effects with complimentary goods creates a positive network effect
• Markets are likely to ‘tip’, hence strong network effects will give one product the advantage
• Advertisement and expectations are important

Question 3

What does the MRU say about Network Externalities?

Answer 3

• Market Failure when network is too small; and benefits are not realised
• Being stuck in the wrong network can make it difficult to switch to a new alternative
• Monopolies can occur when the market is non-proprietary due to the excludability function
• Can have excess momentum where there is over-investment into a new good
• Firms can try and enter the market using ‘penetrating pricing’
• Policy makers need to make the market more diverse and give Property Rights to Monopoly Markets

Question 4

What does Varian say about new Technologies

Answer 4

• Fear of AI taking over
• New technologies can be more productive than humans
• Changes within the economic structure means that technology must be used for advancements

Question 5

What is considered the stable price for Network goods? What is meant by Critical Mass?

Answer 5

• The second point of contact between the Price and the curve (Not susceptible to shocks)
• Critical Mass: When a firm reaches enough users to become the dominant company within the sector