third edition competing for monopoly: the economics of network goods chapter 16
TRANSCRIPT
Third Edition
Competing for Monopoly: The Economics of Network Goods
Chapter 16
Outline
Network goods are usually sold by monopolies and oligopolies.
The “best” products may not always win. Competition is “for the market” instead of
“in the market”. Antitrust and network goods. Music is a network good.
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Introduction
As of 2014, there were 1.4 billion active users on Facebook.
Match.com, the largest internet dating service, has over 20 million users.
Facebook and Match.com are examples of network goods.
The value to a user depends on how many other people use it.
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Definition
Network good:a good whose value to one consumer increases the more other consumers use the good.
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Self-Check
Which of the following is a network good?
a. Chairs used in a classroom.
b. Software used to create and read documents.
c. Chocolate chip cookies. Answer: b
Markets for Network Goods
Features:
1. Usually sold by monopolies or oligopolies.
2. The “best” product may not always win.
3. Competition is “for the market” instead of “in the market”.
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Markets for Network Goods
1. Sellers are Oligopolies or Monopolies
Most people want to use software that is compatible with others
Pressure of coordination creates a near-monopoly Example: Microsoft
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Markets for Network Goods
1. Sellers are Oligopolies or Monopolies
Sometimes more than one firm can compete on different features, specialized niches Examples: Match.com, Jdate.com,
OKCupid, eHarmony
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Self-Check
Why are network goods usually sold by monopolies or oligopolies?
a. Pressure to be compatible.
b. Pressure to be the cheapest.
c. Pressure to provide the best product.
Answer: a
Markets for Network Goods
2. Best Product May not Win
A market may lock in on an inferior product or network
Lock-in can be shown with a coordination game
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Definition
Coordination Game:A game in which the players are better off if they choose the same strategies, but there is more than one strategy on which to coordinate.
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Coordination Game
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
Alex and Tyler can choose either Apple or Microsoft software
Alex’s choices are the rows.
Tyler’s choices are the columns.
Coordination Game
Alex’s payoff
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
Tyler’s payoff
Coordination Game
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
If they use different software, it is difficult to work together (low payoffs).
Coordination Game
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
If they use the same software, it is easier to work together (high payoffs).
Coordination Game
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
If both choose the same software, neither has an incentive to change.
Definition
Nash Equilibrium:A situation in which no player has an incentive to change his or her strategy unilaterally.
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Coordination Game
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Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
With TWO equilibria, the choice is often determined by “accidents of history”.
Markets for Network Goods
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The current QWERTY keyboard may not be the best design
QWERTY came first and got locked in
The Dvorak keyboard, developed in the 1930s
TOSHIK/SHUTTERSTOCK
Markets for Network Goods
Product Design in Network Markets:
Ensure product fits into rest of the market
Make it easy to use for as many people as possible
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Self-Check
When there are two equilibria in a network market, the winner is usually decided by:
a. Democratic vote.
b. Who produces at the lowest cost.
c. Accidents of history.
Answer: c
Markets for Network Goods
3. Competition “for the market”
Consumer loyalties can switch quickly A monopoly can easily change hands
1988: Lotus 1-2-3 had 70% of the spreadsheet market
1998: Excel had 70% of the market
Results in serial monopolies
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Definition
Contestable Market:A market in which the threat of potential competition is enough to make it behave competitively.
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Self-Check
Which of the following is most likely to operate in a contestable market?
a. Railroad.
b. Pharmaceutical company.
c. Restaurant.
Answer: c
Markets for Network Goods
3. Competition “for the market”
In a contestable market, a new competitor could take away business
This threat forces firms to make choices in light of potential competition
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Switching Costs
Incumbent firms often try to limit the contestability of the market
One way is to increase switching costs • Example: Apple makes it easy to
download content to iPad • Difficult to export to other systems
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Antitrust
Regulating Network Markets:
Market for network goods will be dominated by a few firms
Not monopoly vs. competition, but one monopoly vs. another
Important that competition for the market is not impeded
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Music is a Network Good
The more downloads a song has, the more people want to download it
Bands often get popular quickly Popularity feeds on itself even if they’re
not the “best” Easily dethroned by the next new band
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Takeaway
Network goods are usually sold by monopolies or oligopolies
Sometimes customers will get locked in to the wrong network
There is a coordination problem in switching from one network to another
Contestable markets force incumbents to act competitively