Week 1 Flashcards
What are products with network effects?
Products for which it is better for a consumer to acquire a product that is bought and/or used by many.
What are the two different types network effects? What are some examples of these network effects?
Direct network effects
- Network effects that arise because of direct consumer engagement with each other
- E.g., phones, languages, conventions (driving on the right), online market places
Indirect network effects
- Network effects that arise from the existance of complementary products
- E.g., credit cards, videoconsoles, smartphones, newspapers
What does 𝜃 mean?
It captures the consumer hetrogeneity, it has range [0, 1], it is F(𝜃) distributed.
What does Vθ(q) − p mean?
What does qe mean?
qe is the expectation of the network size.
When does a consumer with taste 𝜃 buy a network good?
How to find the individual indifferent between buying the network good and not buying?
What is the formula for the total network size? What is the formula in consumer equilibrium?
Note: these solutions are not unique.
How to derive the price of a network good under perfect competition?
Under perfect competition p = c, thus q(p) = q(c)
How to derive the price of a networked good under a monopoly?
We know that the profit of a monopoly is given by:
𝜋(q) = q(p(q) - c)
We fill in the values and find the First Order Condition = 0. (Additionally we can test SOC is negative).
What is the difference between an monopoly and a perfect competition, regarding the network size and price?
A monopoly supports a smaller network, however at a higher price compared to a perfectly competitive firm.
What is the formula of the social welfare?
How to maximize social welfare?
Find FOC and equate to zero.
