In order to answer this week\'s discussion question you must have read the secti
ID: 1224085 • Letter: I
Question
In order to answer this week's discussion question you must have read the section on "network externalities" in Chapter 10. After you've read that section, answer these questions. First, what is the definition of network externalities? Second, think about your phone. Imagine the situation where you could only call/text/contact other people who have the SAME phone provider you have: Verizon customers can only contact other Verizon customers; Sprint customers can only contact other Sprint customers, etc. What exactly does that have to do with network externalities? And third, would you be willing to operate under that scenario (Verizon - people-can-only-call- Verizon- people) if it meant your phone bill was cut in half every month? Why or why not?Explanation / Answer
In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it
The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case.Online social networks work in the same way, with sites like Twitter and Facebook becoming more attractive as more users join.
The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion).
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