Topic 1: Network Ext and SC

Question 1

band wagon effect

Answer 1

snowball effect

positive network externality
quanity of a good that one person demand increases based on the growth of purchases by other people

Question 2

heterogenous network benefits

Answer 2

Heterogeneous network benefits refer to the advantages that arise when different types of users, devices, or services connect and interact within a network. These benefits come from the diversity of participants, as they enhance the network’s overall value by meeting varied needs and fostering new opportunities.

u(theta) = theta * n^e - p

Question 3

heterogenous stand alone benefits

Answer 3

Heterogeneous stand-alone benefits refer to the individual advantages or value gained by diverse types of users, devices, or services from being part of a system or network, even if they function independently and do not interact directly with other parts of the system.

u(theta) = theta + n^e - p

Question 4

what does theta denote

Answer 4

willingness to pay

Question 5

Two types of consumer expectations are

Answer 5

myopic
fulfilled

Question 6

myopic expectations

Answer 6

consumers base their expectations on the current network size

Question 7

fulfilled expectation

Answer 7

consumers base their decisions on expectations on future size of the network (after all decisions are made) - assume that in equilibrium, these expectations are rational and turn out to be correct

size of the network (expected and actual) n^e

Question 8

What is the demand function with network effects

Answer 8

p(n,n^e) = n^e(1-n)

theta - willingness therefore 1-theta will also subscribe

Question 9

What are the three expectations equilibria

Answer 9

no consumer buys
small number of consumers buy - product purchased only by consumers with high valuation
large number of consumers buy - high expectation

Question 10

Due to the presence of network effects that affect consumers’ utility
differently, there may exist multiple consumer equilibria for a given
price for the network good.

Question 11

What criteria can be used to determine the best equilibrium among many

Answer 11

Stability - equilibrium should persist even id there is a small perturbation

pareto dominance: the preferred equilibrium should prevail

Question 12

What is critical mass

Answer 12

unstable equilibrium (n1(p)) is called the critical mass..

Critcal mass is the Threshold number of consumers (or market share, or…) above which a
‘snowball effect’ starts, leading to the equilibrium with a large
network.

Question 13

How are price and critical mass related

Answer 13

The critical mass is always a function of the market price, meaning
that a rise in price would imply an increase in the critical mass and
a decrease in the market price will decrease the critical mass

Question 14

what are some strategies used to get to critical mass

Answer 14

penetration pricing (price < marginal cost)
Managing expectations (fers to the strategy of influencing consumer beliefs and perceptions about the future success of a product or network)
extending the existing network via strategic bundling

Question 15

Discuss what are compatible and incompatible goods

Answer 15

Incompatible goods - exist with different networks, one good eventually dominates, competition for the market

compatible goods - single nextwork
several goods may coexist
competition in the market

can make goods compatible through standardization

Question 16

Properties of competition between incompatible goods

Answer 16

Path dependence - outcome depends on the way in which adoptions build up
Inflexibility or lock in - left behind good will need to bridge a widening gap if it is chosen by adopters at all
Non-predictability - process locks into monopoly - but one cannot predict this before hand
Potential inefficiency -

Question 17

Disucss relationship between demand for variery and high network effects

Answer 17

low demand for variety and high network effects (higher willingness to pay) == High likelihood of tipping

High demand for variety (less competition), less willingness to pay == low likelihood of tipping ;; otherwise it depends

Question 18

Positive feedback

Answer 18

Weak get weaker, strong get stronger - winner takes the whole market

Question 19

installed base

Answer 19

total number of products used

size of installed base of users can present a barrier to entry for new firms

Question 20

collective switching costs

Answer 20

switching costs of all users

Question 21

coordination problem

Answer 21

hard to convince users to switch to another technology even if it is superior -> nobody wants to be first -> this is worse that individual lock in

strong incentives for early movers to build a large installed base

competitors with significant product advantages or a better pricing strategy can overcome the advantage of an installed base

Question 22

Ineffeciencies

Answer 22

Excess inertia - stick to old, inferior technology even though the new technology is superior

Excess momentum - consumers switch to a new technology,
even though the old technology is still more socially desirable

When there are network effects, the transition from an ‘old’ to a ‘new’
technology can be inefficient, due to a coordination problem between
users

Question 23

How can a pareto dominating technology be coordinated with

Answer 23

if there is complete information and firms announce their choice of technology sequentially

if there is incomplete information, there is the possibility of excess inertia and excess momentum

Question 24

How does switching costs affect price competition?

Answer 24

If consumers are already locked in using a specific product, firms may raise prices knowing that consumers will not not switch unless the price exceeds to cost to switch to the other brand

if consumers are not locked in, there will be intense competition

Question 25

Describe lock in strategies

Answer 25

Offering complementary services and goods
automatic subscriptions