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Economy and network effect (externality): modeling and analysis

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Economy and network effect (externality): modeling and analysis

  1. 1. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsPart 3: The Economy and Network Effects Sumant Kulkarni International Institute of Information Technology, Bangalore Sumant Kulkarni Externalities and Network Effects 1/48
  2. 2. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsAgenda Revision: Network Externalities. Economy without Network Effect. Economy with Network Effects. Sumant Kulkarni Externalities and Network Effects 2/48
  3. 3. Revision: Network ExternalitiesThe Economy without Network Effects The Economy with Network Effects Revision: Network Externalities Sumant Kulkarni Externalities and Network Effects 3/48
  4. 4. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsExternality Two parties do business willingly only if there is a profit for both of them1 . Business may be the exchange of financial value (like renting house) or social welfare (like marriage). Externality either puts some cost or provide some benefit to the people not involved in the business. For example: Renting out a house to a night club in the residential complex (assume that it is legal). Renting out a house to a very influential politician with mindset of helping people. 1 Kelvin Hartnall, Externalities and Network Effects Sumant Kulkarni Externalities and Network Effects 4/48
  5. 5. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsNetwork Externalities We are part of many networks. For example, Network of same company car users. Network of same telephone service. Network of people using same social network. Network Externality is a phenomenon in which entry of new user into the network, has either benefit or cost to the other user of the network. If the entry costs something to other users, then it is Negative Externality. If the other users are benefited, it is Positive Externality. Sumant Kulkarni Externalities and Network Effects 5/48
  6. 6. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsNetwork Externalities In the networks showing network externality, the users have two separate sub part in the value he receives by being a part of the network2 . 1 Autarky value: The value from the product/service he is using (consumer has paid for it). User gets this even if there is no other person using the same product/service. 2 synchronization value: The value from the network as the result of joining it (complementary but not optional). The latter part of the value decides whether it is Positive Externality or Negative Externality. 2 Network Externalities (Effects) by S. J. Liebowitz and Stephen E. Margolis Sumant Kulkarni Externalities and Network Effects 6/48
  7. 7. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsNegative Externalities If the entry of a new user into the network costs something to other users of the network, then it is Negative Externality. A classic example is the traffic congestion. The negative externalities can often be seen in the later stage of networks, where resources are finite. What other reasons can be there for a network to have negative externality? Can their be a network which is having negative externality from the first user of the network? Is negative externality a manifestation of the indication of resource crunch? Sumant Kulkarni Externalities and Network Effects 7/48
  8. 8. Revision: Network Externalities The Economy without Network Effects The Economy with Network EffectsPositive Externalities If the other users are benefited by the entry of a new user into the network, then it is Positive Externality. In positive externality, “The value of the service or product will increase as its installed base expands3 ”. Positive Externality is known as Network Effect. Though many networks have Network Effect initially, once they start facing resource crunch and once they scale above a level, they might start showing negative externality. 3 Network Effects and the Impact of Free Goods: An Analysis of the Web Server Market Sumant Kulkarni Externalities and Network Effects 8/48
  9. 9. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on MarketThe Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Economy without Network Effects Sumant Kulkarni Externalities and Network Effects 9/48
  10. 10. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Setup of the Economy without Network Effects We make many assumptions to simplify the complexity of the market. The market is for one good and has huge number of consumers. Basic Condition = No Network Effect in the Market Condition ⇒ Consumers do not care how many other users of the good are there. Sumant Kulkarni Externalities and Network Effects 10/48
  11. 11. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Economy without Network Effects Let us analyse the way market function with the assumption. Assumption: Large number of potential purchasers with very little individual share in purchase. ⇒Each user can make independent individual decisions without affecting other users. Example: User buying a car does it without thinking about whether his decision affects the price of the car in market. Real markets with finite real users do behave like this. The effect of each individual can be very negligible on the aggregate. Hence, we completely ignore the effect of each individual on the market while modelling the economy. Sumant Kulkarni Externalities and Network Effects 11/48
  12. 12. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodModeling Consumers Consumers are represented as the set of all real numbers in the interval strictly between 0 and 1. Q1: set of all real numbers in the interval strictly between 0 and 1 is infinite. How do we map them to finite number of n+1 N−n+1 users (say N)? Ex. (Map(n) = N ), (Map(n) = N ) Each consumer is named after a different unique real number. Sumant Kulkarni Externalities and Network Effects 12/48
  13. 13. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodModeling Consumers Due to uniform distribution, set of consumers between 0 and x < 1 represent x fraction of population. We can think of this model of consumers as the continuous approximation of market with large but finite number of consumers. Q2: How does the continuous model avoid having to deal with the explicit effect on any one individual on the overall population? (May be due to the uniform distribution of the consumers between 0 and 1. How how exactly does it help?) Sumant Kulkarni Externalities and Network Effects 13/48
  14. 14. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodModeling Consumers Willingness to Buy Assumption: Each consumer wants to buy at most one unit of the good. Value of that one unit of good for the consumer is determined by the intrinsic interest of the consumer to buy it. No other factor than the intrinsic interest motivates him to buy the good. Sumant Kulkarni Externalities and Network Effects 14/48
  15. 15. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodReservation Prices Let us consider how market looks with the above assumptions. Each consumer’s interest in the good is specified by a single price called reservation price. Reservation price ( r(x) ) is the maximum amount the consumer x is willing to pay for one unit of the good. Assumption: Consumers are arranged in the decreasing order of their reservation price between 0 and 1. If r (x) > r (y ) then x < y . To be more clear r (0) > r (1) and 0 < 1 Assumption: r (·) is a continuous function and no two consumers have exactly the same reservation prize. r (·) is strictly decreasing over the increasing interval 0 to 1. Sumant Kulkarni Externalities and Network Effects 15/48
  16. 16. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodMarket Price for a Unit of Good Market Price (p) for a unit of good is the minimum price at which the good can be bought and there will not be any unit of the good sold below price p. Assuming that there will not be any unit of the good sold below price p. Any x having r (x) >= p can buy the good and any x having r (x) < p can not buy the good. (Why?) At p > r (0), nobody can buy the good. (Why?) At p <= r (1), everyone can buy the good. (Why?) Sumant Kulkarni Externalities and Network Effects 16/48
  17. 17. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodFigure: When there are no network efforts, the demand for a product at afixed market price p can be found by locating the point where the curvey = r (x) intersects the horizontal line y = p. Sumant Kulkarni Externalities and Network Effects 17/48
  18. 18. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodMarket Price for a Unit of Good r (·) is strictly decreasing continuous function. For r (·), in the region between 0 and 1 (the region of interest), their lies a unique sweet point for which r (x) = p. This means: The consumers between 0 and x (including x), can buy the good. The consumers named greater than x can not buy the good. Hence, x fraction of the consumers buy the product (due to uniform distribution assumption). Sumant Kulkarni Externalities and Network Effects 18/48
  19. 19. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodMarket Demand for the Good For every prize p, there will be an x, which specifies the fraction of population that will purchase at price p. The x (determined from price), is an indicator of Market Demand for the good. Increase in x shows the increase in demand. Sumant Kulkarni Externalities and Network Effects 19/48
  20. 20. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodMarket Demand for the Good Increase in x shows the increase in demand. r (·) describes the inverse demand function. (Why?) p = r (x) and hence x = r −1 (p). This relation between number of units consumed (x) and the price p is very interesting. To sell more units we need to reduce the price. Sumant Kulkarni Externalities and Network Effects 20/48
  21. 21. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Equilibrium Quantity of the Good Assuming that constant production cost/unit of good is p ∗ Assuming that there are many producers so that no one can influence the market. The producers will be willing to supply any amount of goods at the prize p ∗ per unit. The producers will not be willing to supply any amount of goods at the prize lesser than p ∗ per unit. It is highly unlikely that the price of the per unit good will remain above p ∗ (competition). Profit is ZERO. This is due to long-run competitive supply for any good produced by a constant-cost industry. Sumant Kulkarni Externalities and Network Effects 21/48
  22. 22. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Equilibrium Quantity of the Good If p ∗ (constant production cost/unit) is above r (0), no one can buy the good. If p ∗ is below r (1), everyone buys the good. Thus, the interesting point is r (0) > p ∗ > r (1) When r (0) > p ∗ > r (1): When p ∗ = r (x ∗ ), we call x ∗ the equilibrium quantity of the good for given reservation prices and cost p ∗ . Usually 0 < x ∗ < 1 for a stable market for a good. Sumant Kulkarni Externalities and Network Effects 22/48
  23. 23. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodThe Equilibrium Quantity of the Good - Reservation Priceand Cost Figure: When copies of a good can be produced at a constant cost p ∗ per unit, the equilibrium quantity consumed will be the number x ∗ for which r (x ∗ ) = p ∗ Sumant Kulkarni Externalities and Network Effects 23/48
  24. 24. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodEquilibrium Quantity x ∗ represents an equilibrium in the population’s consumption of the good. If consumption < x ∗ , then there will be “upward pressure” on the consumption of good. (Want to Buy as r(x) = p > p ∗ ) If consumption > x ∗ , then there will be “downward pressure” on the consumption of good. (Regret as r(x) = p < p ∗ ) Sumant Kulkarni Externalities and Network Effects 24/48
  25. 25. Setup of Market Revision: Network Externalities Formally Modeling the Lack of Individual Effect on Market The Economy without Network Effects How Market looks with no Network Effects The Economy with Network Effects The Equilibrium Quantity of the GoodSocial Welfare (SW) Social Welfare is the the difference between total reservation prices of consumers who bought a copy of the good and total production cost of those many units of good. For x units of goods, the Social Welfare will be possible only when they are allocated to all consumers between 0 and x. When x = x ∗ (equilibrium), then the Social Welfare is maximum. Sumant Kulkarni Externalities and Network Effects 25/48
  26. 26. Revision: Network Externalities Effect of Network Effects on Purchase of a GoodThe Economy without Network Effects Equilibria with Network Effects The Economy with Network Effects The Economy with Network Effects Sumant Kulkarni Externalities and Network Effects 26/48
  27. 27. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsEffect of Network Effects on Purchase of a Good The price of an unit of good is determined by Intrinsic interest - (own reservation price) - r (x) Number of consumers already using the good - z There will be two independent factors influencing the reservation price (RP) of a consumer - r (·) and f (·). r (x) - Intrinsic interest for the consumer x. f (z) - Benefit to each consumer for having z fraction of population using the good. RP(x) = r (x) · f (z) Multiplication means, increase in the fraction of people using the good (z) increases the reservation price even when there is no change in the intrinsic interest. Increase in any or both increases the reservation price. Sumant Kulkarni Externalities and Network Effects 27/48
  28. 28. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsPricing the Good Assumption: f(0) = 0 ⇒ If no units of good purchased, then no one will buy it. The consumer willingness to pay depends on the fraction of population using the good. The prediction of fraction of population (z) using the good is very important. Assumption: p ∗ is the price of one unit the good and z fraction of population will use the good, then A consumer x will buy the good only if r (x)f (z) p∗ Sumant Kulkarni Externalities and Network Effects 28/48
  29. 29. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSelf-fulfilling Expectations Equilibrium (SFEE) Assumption: The prediction about number of users of the good (z) is always correct. What do we mean by always correct (exact) prediction of z? “the consumers as a whole form a shared expectation that the fraction of population using the good is z and buy it. Due to this, the exact fraction of population reaches z fraction”. This is self-fulfilling expectations equilibrium for the quantity of purchasers z. In self-fulfilling expectations equilibrium every purchaser of z fraction predicts that z fraction of population is using it. The expectation in turn is fulfilled by people’s own behavior. Coming slides assume that the prediction about number of users of the good is always correct. and Network Effects Sumant Kulkarni Externalities 29/48
  30. 30. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsWhen Do We See Self-fulfilling Expectations Equilibrium We observe 2 self-fulfilling expectations equilibria. When z = 0 (i.e. When no fraction of populations has bought the good.) When 0 < z < 1 (i.e. When some fraction of populations has bought the good.) Assumption: Price/Unit of good = p ∗ > 0. Sumant Kulkarni Externalities and Network Effects 30/48
  31. 31. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSelf-fulfilling Expectations Equilibrium When z = 0 (i.e.None of the populations has bought the good.) When z = 0 No one will buy the good. Reservation Price of any consumer x can be given as RP(x) = r (x) · f (0) = 0 RP(x) < p ∗ (price of the good) No one will buy the good as the reservation price is 0 (RP(x) < p ∗ ). The state persists (no increase or decrease in the fraction of consumers). Hence, this is an equilibrium. Sumant Kulkarni Externalities and Network Effects 31/48
  32. 32. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSelf-fulfilling Expectations Equilibrium When 0 < z < 1(i.e. Some of the populations have bought the good.) If exactly z fraction of population can buy the good, then If any x, where x <= z can buy the good. Hence, only the consumers between 0 and z can buy the good. The price p ∗ at which these consumers want to purchase the good can be determined as below. z has lowest reservation price of all the people who can buy. This is because only consumers who can buy are 0 to z. Hence RP(z) = p ∗ The Reservation price of z = RP(z) = r (z) · f (z) p ∗ = r (z)f (z) As only z fraction can purchase at this price, this is a SFEE. Sumant Kulkarni Externalities and Network Effects 32/48
  33. 33. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsCharacteristics of SFEE with an Example To confirm whether Self-fulfilling Expectations Equilibria exists, we need to know both r (·) and f (·). Consider an example where, r (x) = 1 − x f (z) = x. p = r (z)f (z) = (1 − z)z = z(z − 1) = z 2 − z This is a quadratic equation representing a parabola. Sumant Kulkarni Externalities and Network Effects 33/48
  34. 34. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSFEE - Example Figure: The plot of the consumer Fraction z versus the Price (p). The quadratic equation p = z(z − 1) = z 2 − z is represented in the plot. Sumant Kulkarni Externalities and Network Effects 34/48
  35. 35. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSFEE - Example The curve reaches its maximum (i.e. p ∗ = 1 ) when z = 4 1 2 There is no equilibrium for p ∗ > 4 . 1 This means, if p ∗ > 1 , then the good is considered too 4 expensive and no one will buy it. Sumant Kulkarni Externalities and Network Effects 35/48
  36. 36. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSFEE - Example When z = 0, There price of the good for any consumer x is r (x)f (z) = r (x)f (0) = 0 No one will buy the good as p ∗ > 0 i.e p ∗ > reservation price There will not be any increase in z due to this. Hence, z = 0 is an equilibrium. Sumant Kulkarni Externalities and Network Effects 36/48
  37. 37. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSFEE - Example When 0 < z < 1, there are two equilibria Earlier Equilibrium z Later Equilibrium z Sumant Kulkarni Externalities and Network Effects 37/48
  38. 38. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsPressures in the SFEE Any fraction other than z = 0, z = z and z = z do not form SFEE. Hence, if the fraction z is any point other than z = 0, z = z and z = z , then there will be different kinds of pressures acting in the system. Sumant Kulkarni Externalities and Network Effects 38/48
  39. 39. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsPressures in the SFEE If z is between 0 and z The actual fraction of purchasers (z) is lesser than the SFEE fraction z . (p = r (z)f (z)) < (p ∗ = r (z )f (z )) Value of the purchased good due to z fraction consumers is less than the price of the good p ∗ . People have got good which has lower value than their RP. People feel that they should not have bough that good. Number of people buying reduces, pushing the demand down. This is Downward Pressure on consumption. Sumant Kulkarni Externalities and Network Effects 39/48
  40. 40. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsPressures in the SFEE If z is between z and z The actual fraction of purchasers (z) is greater than the SFEE fraction z . (p = r (z)f (z)) > (p ∗ = r (z )f (z )) Value of the purchased good due to z fraction consumers is more than the price of the good p ∗ . People have got good which has more value than their RP. People feel good about it and more people start buying. Number of people buying increases, pushing the demand up. This is Upward Pressure on consumption. Sumant Kulkarni Externalities and Network Effects 40/48
  41. 41. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsPressures in the SFEE If z is between z and 1 The actual fraction of purchasers (z) is greater than the SFEE fraction z . (p = r (z)f (z)) < (p ∗ = r (z )f (z )) Value of the purchased good due to z fraction consumers is less than the price of the good p ∗ . People have got good which has lower value than their RP. People feel that they should not have bough that good. Number of people buying reduces, pushing the demand down. This is Downward Pressure on consumption. Sumant Kulkarni Externalities and Network Effects 41/48
  42. 42. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsStability of z More stable Equilibrium. If z crosses z , downward pressure will pull it towards z . If z is between z and z upward pressure will push it to z . Sumant Kulkarni Externalities and Network Effects 42/48
  43. 43. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsStability of z If z is between 0 and z - approach 0. If z is between z and z - approach z . Highly unstable. It is known as critical point or tipping point. If z crosses z , it will increase till z . If z is lesser than z , then the fraction of people consuming the good will reduce and becomes 0. Very important to cross the z , to success in the business. Sumant Kulkarni Externalities and Network Effects 43/48
  44. 44. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsSFEE - Some Observations Two important observation (for the same good, at the same price): Effect of consumer confidence. Effect of relationship between the price and the equilibrium quantity. Sumant Kulkarni Externalities and Network Effects 44/48
  45. 45. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsEffect of Consumer Confidence. Self-fulfilling expectations equilibrium corresponds to consumer confidence. If no consumer confidence in the success of the good, no success will be seen. If population is confident in the success of the good, the success will be seen. Multiple Equilibria are due to the different characteristics of the markets in which NE works. The number of equilibria will depend on the type of Market. Sumant Kulkarni Externalities and Network Effects 45/48
  46. 46. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsEffect of the Relationship between the Price and theEquilibrium Quantity In the market with NE, the relationship between price and equilibrium quantity is more complicated than that with out NE. For example, as p ∗ goes on dropping below 1 , z moves to the 4 left and z moves to the right. This means that each equilibria move away from each other. This means that, z moves towards smallerKulkarni Sumant fractionExternalities and moves towards the while z Network Effects 46/48
  47. 47. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsReferences Network, Crowds and Markets - book Network Effects, http://www.moreno.marzolla.name/ teaching/CS2011/NetworkEffects.pdf The Economy with Network Effects, http://www.systems.ethz.ch/education/fs11/ struct-social-inf-networks/lectures/Lecture%209. pdf Reverse Network Effect, http://www.readwriteweb.com/archives/is_there_a_ reverse_network_effect_with_scale.php Sumant Kulkarni Externalities and Network Effects 47/48
  48. 48. Revision: Network Externalities Effect of Network Effects on Purchase of a Good The Economy without Network Effects Equilibria with Network Effects The Economy with Network EffectsNetwork effects: related pages Barriers to entry - Anything that makes it difficult for a new entrant to break into a market. First mover advantage - The competitive advantage that the first company to launch a new type of product should have over those that start later. Natural monopoly - A monopoly that arises from the nature of the industry, rather than being imposed by law or resulting from anti-competitive practices. Product differentiation - Making a product or service look different in the eyes of consumers. Submarine patent - A patent that is deliberately kept quite, in the hope of extracting money later from those who use an idea believing it not to be patented. Cross licensing - Exchange rights to patent portfolios, which reduces Sumant Kulkarni Externalities and Network Effects 48/48

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