Lecture 3: Market Entry Part 1 - Standard battles and design dominance Flashcards
Why are dominant designs selected?
- Increasing returns to adoption
-> When technology becomes more valuable, the more it is adopted - Absorptive Capacity
- Network externalities
- Government Regulations
What are the two primary sources of dominant designs?
- Learning effects
- Network externalities
What’s the absorptive capacity? And what does it suggest?
= a firm’s prior learning experience influences its ability to recognize and utilize new information
= The use of a particular technology builds knowledge about it
= This knowledge base helps firms to use and improve the technology
=> Suggests that technologies adopted earlier than others are likely to become better developed, making it difficult for other technologies to catch up
What are network externalities?
= The benefit from using a good increases with the number of others using the same good
= NE are common in industries that are physically networked
= A technology with a larger installed base attracts developers of complementary goods
–> Technology with a wide range of complementary goods attracts users
–> Increasing installed base
=> Self-reinforcing cycle
What are the results of dominant designs?
= Winner-Takes-All Markets
= Natural monopolies
= Firms supporting the winning technologies earn huge rewards, others may be locked out
Multiple dimensions of value:
The value is strongly influenced by….
- Technology’s stand-alone value
- Network externality value
What factors does the stand-alone value include?
- The functions the technology enables customers to perform
- its aesthetic qualities
- its ease of use
Example:
- Supplements
- Maintenance
…
What is the Network Externality Value?
(Direct and indirect network effects)
The value created by…
1. The size of the technology’s installed base (Direct)
2. The availability of complementary goods (Indirect)
To successfully overthrow an existing dominant technology, a new technology must either offer:
- Dramatic technological improvement
- Compatibility with existing installed base and complements
Winner-takes-all-markets
Are the markets good for consumers?
= Network externalities suggest that users sometimes get more value when one technology dominates instead of when competition regulates the market
= Network externalities benefits to the customers rise with cumulative market share
= BUT: Potential for monopoly costs also rise with cumulative market share
= Where monopoly costs exceeds network externalities benefits, intervention by the government might be needed
What is Modularity
= Modular systems are those that can be separated and recombined to change their configuration, scale, or functions
-> Standardized interfaces ensure that components are compatible
-> Sometimes components from different producers are recombined, and sometimes components from only one producer are recombined
=> Industry players use modularity to create a platform ecosystem where many different firms contribute to the product system
Modularity is more valuable when there are…
- diverse technological options that can be recombined
- customers have heterogeneous preferences
What are Platform Ecosystems
= In a Platform ecosystem, some core part of a product mediates the relationship between a wide range of other components or complements and prospective end-users
-> well-defined boundaries of a platform
-> Success of all members of the ecosystem depends in part upon the success of the other members
=> Platform ecosystems strike a balance between pure modularity and pure integration
Pure Modularity
= Combinations take place in the market
-> No co-specializations
= Choice and reconfiguration
= Competition enforces firms to increase quality and decrease price
= Quality and compatibility is uncertain
-> can be hard for customers
Platforms
= Components not owned but curated (carefully chosen)
= Choice and reconfiguration ability
-> BUT: shepherd by platform owners
= Competition still incentivizes
= Producer exerts some control over quality and compatibility
