Topic 2: Two sided markets Flashcards
What are the unique traits that digital products presetn
non-rival - more consumption does not decrease availability to others
zero marginal cost of production and distribution
lower marginal cost of search
lower transaction cost than non digital produts
What components does increased digitization have an impact on
structure of markets - low barriers to entry - increasing returns to scale
conduct of firms - more business strategies
performance of markets - perfect competition does not work as well, markets are dynamic with strong increasing returns, economies of scale and network effects
What does cost reduction due to digitization allow
scalability
customization
innovation
Physical network
telephone, fax, whatsapp, internet
virtual networks
users of a physical network - users of similar hard/software, players of games, users of consoles
Characteristics of network industries
network externalities
switching costs and lock in
complementarity, compatibility and standardization
significant economies of scale
What is network externalties
utility derived from the consumption of a network good is affected by the number of other people using similar or compatible products
market outcome depends on consumers expectations of the number of users
metcalfes law on the size of a network
n(n-1) - due to communication possibilities in the network
Types of switching costs
cost of breaking contract
time spent learning new products
search costs
lost loyalty benefits
what is consumer lock in
when switching costs outweigh price differential between product being used and the product from other firms
degree of lock in depends on the magnitude of the switching costs
consumers can be locked in due to coorindation problem due to network effects
Discuss the degree of switching costs weak vs strong
weak - firms try to induce switching costs to make their product the preferred choice
mobile networks, communication apps, internet browser
strong - firms can exploit current customers without leaving them any choice
operating systems, game consoles, email addresses, bank accounts
what is complementarity, compatibility and standards referring to
complementarity - some products are only useful if consumed with other products - desktops are only useful when used with software, monitors etc.
to work together, complemetns must be compatible - dvd/dvd players, mobile phones and mobile technology
to be fully compatible, the products must work on the same standard or rely on converters - creates problem of coordination
What is meant by economies of scale
production of the first copy or any information involves a huge sunk cost which cannot be recovered or fixed cost - further copies cost nothing to create and distribute
What are berriers to entry for network industries
the features (switching costs, network externalities, economies of scale, comple compat and standards) create barriers to entry - obstacles that firms face when trying to enter the market
it is difficult to unseat the incumbent
