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ECN212 Week 10 Note

by: Phoebe Chang

ECN212 Week 10 Note ECN 212

Marketplace > Business > ECN 212 > ECN212 Week 10 Note
Phoebe Chang
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The Economic of Network Goods
William Foster
Class Notes
economic, goods, Money, Microeconomic
25 ?




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This 5 page Class Notes was uploaded by Phoebe Chang on Monday April 18, 2016. The Class Notes belongs to ECN 212 at a university taught by William Foster in Spring 2016. Since its upload, it has received 15 views.

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Date Created: 04/18/16
ECN212​ TheEconomicofNetworkGoods SpringSEMESTER2016 Professor:Dr.WilliamFoster EliteNotetaker:Phoebe( Concept Outline ● Network goods are sold by monopolies or oligopolies ● “Best” products don’t always win ● Standard wars are common ● Competition is for the market, not in the market ● Contestable markets ● Antitrust and Network goods ● Music is a network good Introduction ● Examples of network goods ○ Facebook ■ 500 million active users by 2010 ○ ■ 20 million users ■ Largest dating service ● Bandwagon Effect ○ The more that people use it, the higher the more next marginal person will value it ○ E.g. Social media ● Snob Effect ○ The more that other people use it, the lower the next marginal person will value it ○ E.g. Designer clothes, rush hour traffic ● Network good 1 ○ A good whose value to one consumer increases the more other consumers use the good Sold by Monopolies or Oligopolies ● Microsoft ○ Sells above MC ○ Successful though there are free alternatives ○ A near pure monopoly ● Online Auctions ○ eBay/Craigslist ● Online Dating ○ ○ eHarmony ○ Yahoo! Personals The “Best” Products Don’t Always Win ● Coordination Game ○ The players are better off if they choose the same strategies ○ But there is more than one strategy on which to coordinate ● Nash Equilibrium ○ A situation in which no player has an incentive to change his or her strategy unilaterally ○ IF no Pure-Strategy Nash Equilibrium ■ Create a non-stop changing loophole ■ One change, the other changes ● Importance of Networks ○ Product design isn’t about standard ○ Making sure it fits into the rest of the industry ○ Making things easy for users ■ Maintain simplification and shortcuts ■ “Experts” don’t like it ■ “Google” / “Microsoft” is evil 2 Standard Wars Are Common ○ Two good equilibria ■ Standard HD DvDs ■ Toshiba ■ Less complex ■ Cheaper ■ In xBox ■ Blu-ray ■ Sony ■ Store more information ■ In PS4 ○ Allow customers to choose ○ Once it’s standard, price increases Competition “for” the market ● Network monopolies/oligopolies are different due to the speed monopoly can change hands ○ Microsoft too over Lotus 1-2-3 (1988 to 1998) Contestable Markets ● Definition ○ One with a competitor that could credibly enter and take away business from the incumbent ● Fear of potential competitors motivates (fb) incumbent to: ○ Low prices (free) ○ Stronger privacy settings ○ improve interface / games / apps ● Contestability of a market rises to the extent ○ Fixed costs are low (relative to potential revenue) ○ No or few legal barriers to entry ○ Incumbent has no hard to replicate resources ○ Consumers are open to prospect of dealing with a new competitor ● Example ○ Piped water- not a contestable market ■ High entry costs to lay new pipes 3 ■ Incumbent could match any price offer made by entrant ■ Natural monopoly ○ Mineral water- is a contestable market ■ Low fixed cost ■ Incumbent firm don’t have much advantages ● Limiting Contestability with Switching Costs ○ Strategy to limit contestability ○ Switching Cost ■ Costs of switching purchases from one firm to another ■ Can be giving coupons, discounts, frequent mileage, etc ■ E.g. Phone carriers, Airline loyal plans, book sellers ○ Examples ■ Facebook: don’t charge for adding pictures ■ iPad: make it hard for people to export content ○ Loyalty Plans ■ Monopoly power- net effect of discounts is higher prices ■ Prisoner’s dilemma ■ Good for one customer ■ Bad for all customer together ■ Price discrimination ■ Nontaxable form of income (keeping mileages) Antitrust and Network Goods ● Dominance of Certain Market Good (Few Firms) ○ Lawsuit against Microsoft ○ Windows was packaged with Explorer ○ Explorer switched market share with Netscape ○ Not clear that customers were hurt ○ “competition for the market isn’t impeded” 4 Music Is a Network Good ○ Definition ■ Popular music is the most sold ones ■ Thus, the more downloads a song had, the more people would want to download the some in the future ○ Best Product might not Always Win ■ Popularity feed popularity ■ Luck ○ Standard Wars Occur ■ Artists compete to be seen as the leader of market ■ Who attract fans looking to support what is popular   5


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