Lecture 20Final

Lecture 20Final - EEP 143 Lecture 20 Networks Outline:...

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EEP 143 Lecture 20 Networks Outline: Introduction Direct Network Benefits Indirect Network Benefits
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Introduction Why a competitive market can fail 1. Public goods: 2 characteristics (remember?) Information goods (what solutions to market failure?) 2. Natural Monopoly Electricity distribution Phones? What solutions? 3. Monopolized markets Price fixing, collusion, predation What solutions? 4. Network effects
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Network externalities Physical networks (internet) Like natural monopoly Solution? Direct network externalities Indirect network externalities
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Introduction There are two types of network benefits: Direct: When users of the network care about the number of the users directly (e.g. multiplayer games online – the more the merrier) Indirect: When users know that if the network size increases, then the good’s quality is likely to be improved (does this work for Windows vs. OS for Macs?) A prevalent feature of markets that are characterized by networks is market tipping: Dominance is sequential and each firm becomes and stays a monopolist for only a short time period (Lotus vs. Microsoft Excel)
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Introduction “A network is a group of consumers who consume the same or a compatible good” (Scotchmer 2004) Consumers enjoy network benefits if their utility increases as the size of the network increases (i.e. as more people that consume the good increases) Examples? Text-editing software Computers Internet
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Introduction Networks usually involve standards examples before industrial revolution?
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Networks usually involve standards examples before industrial revolution? Standards can
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Lecture 20Final - EEP 143 Lecture 20 Networks Outline:...

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