Explain how network externalities act as a barrier to entry
What will be an ideal response?
A network externality exists when an individual's decision to purchase a particular product provides benefits not only to that individual but to other users of the product as well. Consider, for example, Microsoft Windows and the Microsoft Office suite of applications. The individual consumer of these products is better off to the extent that she derives value from the product that exceeds the purchase price. However, to the extent that other users of the product are now able to share files and other information with the individual more easily because they are using the same set of products, those users are made better off by her purchase as well. As the number of people using the product gets larger, it becomes more difficult for a new competitor to successfully enter the market because it is increasingly more costly for users of the existing product to switch due to the potential lack of compatibility with the new product.
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If the real interest rate is 8 percent and the inflation rate is 2.5 percent, then the nominal interest rate is
A) 8 percent. B) 10.5 percent. C) 3.2 percent. D) 2.5 percent. E) 5.5 percent.
Which of the following is an important difference between government and privately-owned enterprises?
A) Government can distribute goods without employing discriminatory rationing criteria. B) Government can more easily use negative incentives to obtain resources. C) Government does not produce exchangeable commodities or services. D) Government provides services at a lower opportunity cost. E) Government tends to pay close attention to the varying preferences of the people.