Network Externlilitu]ies Flashcards
What is a network externality
Situationsn in which the benefit a consumer derives from owning a product increases when the number of other consumers increases
socials,e-mail, telephone
what is critical mass?
the required amount to multiply participation across the network. e.g more consumption attracts more and more.
how to attract critical mass?
low prices
what do we mean by the term self-reinforcing?
once the sysstem reaches an absorbing barrier above iyts competition then the multiplying effect will happen as new consumers will choose the market leader
what is excess inertia?
market slow to adopting tyhe new tech
this usually happens when the first adopter is afraid that subsequent adopters wont choose the new tech opting for the old tech and bringing down utility
(a game of expected payoffs)
what is excess momentum?
where initial adopters control the narrative and create momentum for switch to new tech
is compatibility good? (consumers and producers)
for consumers as long as p and q remain unchanged there is a benefit
for producers
lower differentiation in compatibility meaning more intese price competitions
greater benefits for consumers as whole might attract more consumers and gain a larger share
what are the 2 cases of standardisation battle and compatatblity
first case, stanadardisation battle.
firms battle to attract more consumers and may spend more on resources to do so such that they get caught in a bertrand trap where they would have been better off working comparably
second case,
each firm has a 50% of winning and so its a question if half of monopoly profits are better than compatibility profits. If competition in the market is string then monopoly profits would be worth it
standardisation battle or compatibility (under what conditions is each preffered)
If the standardisation battle is intense, firms prefer compatibility, if product mkt competition is strong, firms prefer incompatibility
