Slides7_Networks

Slides7_Networks - The Information Economy Network Effects...

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The Information Economy Network Effects 1
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Network Effects 2 Network Set of interconnected nodes Real network (faxes) and virtual networks (Word users) Network effect (or network externality) A‟s value depends on number of other users (and identity) Positive network effects: email, videoconferencing Negative network effects: congestion Scale economies Network effects = demand-side scale economies Different from supply-side scale economies (i.e. falling MC) Consider the following examples: Electric cars, Gchat, Gmail.
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Growth of a Network 3 Launch Takeoff Saturation (?)
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Demand Side 4
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Strength of Network Effects 5 How does V(N) vary? (Probably S-shaped) Metcalfe‟s law: V(N)=k(N -1) At start, growth may be quicker: care if friends are linked Satiation if care about some links more than others Continual growth if network becomes standard Demand for variety within network Homebuying (MLS listings) vs. mortgage quotes (lending tree) Examples: Mobility (credit cards), Novelty (DVDs) Demand for variety across networks Standardization leads to loss of variety. Example: People buy different cars despite network effects. Interconnection between users (Word vs. LaTeX)
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Agent’s Values 6 An agent‟s value rises as the network size grows
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Demand Curves 7 Demand curves corresponding to three network sizes
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Fulfilled Expectations Demand Curve 8 Values where expected demand equals realized demand Intercept negative positive homing cost, e.g. training, capital.
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Perfect Competition (e.g. email, faxes) 9 Marginal cost pricing yields three equilibria: N0, N1, N2.
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10 Expectations are crucial Homing cost and P>0 mean don‟t want to buy if N low. Care about current base and expected future base. Product will succeed if it is expected to succeed! Penguin problem
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Slides7_Networks - The Information Economy Network Effects...

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