Network effects

Examples of Network effects in the following topics:

• Economies of Scale and Network Externalities

  • Economies of scale and network externalities are two types of barrier to entry.
  • Network externalities (also called network effects) occur when the value of a good or service increases as a result of many people using it.
  • Because of network effects, certain goods or services that are adopted widely will appear to be much more attractive to new customers than competing goods or services.
  • This is evident in online social networks.
  • Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks.

• Other Barriers to Entry

  • Network effects are one reason why it's so difficult for new companies to compete against Facebook: they simply will have difficulty establishing a network of users to compete.

• Telecommunications

  • But they said the telephone monopoly effectively shut them out by refusing to allow them to interconnect with its massive network.
  • In 1984, a court effectively ended AT&T's telephone monopoly, forcing the giant to spin off its regional subsidiaries.
  • In particular, they said, competitors would have no chance of surviving unless they could connect, at least temporarily, to the established companies' networks -- something the Baby Bells resisted in numerous ways.
  • It said the regional monopolies had to allow new competitors to link with their networks.

• Natural Monopolies

  • The cost of constructing a competing transmission network and delivering service will be so high that it effectively bars potential competitors from entering the monopolist's market.

• Price Ceiling Impact on Market Outcome

  • An effective price ceiling will lower the price of a good, which means that the the producer surplus will decrease.
  • While the effective price ceiling will also decrease the price for consumers, any benefit gained from that will be minimized by decreased sales caused by decreased available supply for sale from producers due to the decrease in price.
  • A black market is an underground network of producers that will sell consumers as much of a controlled good as they want, but at a price higher than the price ceiling.

• Farm Policy of the 20th Century

  • Government helped build and maintain a network of farm-to-market roads that made towns and cities more accessible.
  • Soil conservation programs stressed the need to manage farmland effectively.

• Impacts of Technological Change on Productivity

  • Communication:Needless to say, the internet and mobile communications have rapidly expedited the transmission of knowledge, data, information, and networking.
  • Measuring the effects of technology on productivity is a difficult pursuit.

• Few Sellers

  • Any new entrant into the cell phone market will either need to pay one of the larger companies for access to its already-existing network, or try to build a network from scratch.
  • Both options result in higher costs, higher prices, and difficulty in competing with the major networks .

• Fiscal Policy and the Multiplier

  • Fiscal policy can have a multiplier effect on the economy.
  • The size of the multiplier effect depends upon the fiscal policy.
  • There is no direct effect on aggregate demand by government purchases of goods and services.
  • The multiplier effect determines the extent to which fiscal policy shifts the aggregate demand curve and impacts output.
  • Describe the effects of the multiplier beyond its relevance to fiscal policy

• The Slope of the Aggregate Demand Curve

  • Due to Pigou's Wealth Effect, the Keynes' Interest Rate Effect, and the Mundell-Fleming Exchange Rate Effect, the AD curve slopes downward.
  • As a result of Keynes' interest rate effect, Pigou's wealth effect, and the Mundell-Fleming exchange rate effect, the AD curve is downward sloping.
  • In the context of the above discussion on Keynes, Pigou's Wealth Effect underlines the fact that liquidity traps are not sustainable.
  • The simplest way to explain the Wealth Effect is that an increase in spending will denote an increase in wealth.
  • Perhaps the most complex of the three inputs underlined in deriving aggregate demand is the Mundell-Fleming Exchange Rate Effect.