Network Externality

Question 1

What are Network Externalities?

Answer 1

the value or utility a user derives from a good or service depends on the number of users of compatible products.

Question 2

what is critical mass?

Answer 2

The number of users required for a significant network effect is called the critical mass. After critical mass is attained, the good or service attracts additional new users because of the utility or benefits to the consumer.

Question 3

what do we mean by self-reinforcing? locked-in?

Answer 3

The process is self-renforcing: once the system reaches the (absorbing) barrier, every subsequent consumer chooses the leading technology.

The industry is locked- into one of the technology once the absorbing barrier has been reached => parabolic

VHS vs Betamax as standard

Question 4

what is excess inertia/momentum?

Answer 4

A situation where the market slowly adopts the new technology / new technology doesn’t take off because early adopters favour compatibility and fear that subsequent adopters wont adopt

excess momentum - a switch to a new technology occurs even though most people would prefer it not to happen - initial adopters opt for new tech => and subsequent adopters follow

Question 5

+ves & -ves of compatibility (consumer and producer)

Answer 5

compatability is an infinitley good thing from a consumer POV

Producer: Lower degree of product differentiation => more intense price competition
compatibility will attract more consumer attention - firms can capatalise and gain larger market shares

Question 6

standardisation battle or compatibility (2 stage game) 2 scenarios

Answer 6

scenario 1: firms compete to attract customers in a standardisation battle, caught in a Bertrand trap as producers are willing to spend resources to win

scenario 2: each has a 50% probability to win, so only battle if half of the monopoly profits are more than comparability profits. usually half monopoly profits are worth it especially when competition is strong

Question 7

if standardisation battle is intense what do producers prefer?

Answer 7

compatibility

Question 8

if
is intense what do producers prefer?

Answer 8

incompatibility

Question 9

what role does public policy play in standardisation battles?

Answer 9

competition can reduce prices and lead to innovation. however, there may be social costs with the wrong winner. Must find balance between the benefits of standardisation against the cost of lower competition and product variety

depends on information and timing. if too early lack of info on battle. if too late, the standard is already locked in