1) List several products or services subject to network effects. What factors do
ID: 346559 • Letter: 1
Question
1) List several products or services subject to network effects. What factors do you believe helped each of these efforts achieve dominance?
2) Think about the kinds of technology projects you own. What sorts of switching costs are inherent in each of these? Are these strong switching costs or weak switching costs? What would it take for you to leave one of these services and use a rival? How might a competitor try to lessen these switching costs to persuade you to adopt their product?
3) What are the reasons it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present? What is technological leap-frogging and why is it so difficult to accomplish?
4) What tactic might an established firm employ to make it impossible, or at least difficult, for a competitor to gain access to, or become compatible with, their product or service?
5) How do Apple, Microsoft, and Facebook encourage the development of complementary products?
Explanation / Answer
1) List several products or services subject to network effects. What factors do you believe helped each of these efforts achieve dominance?
In network effects, the value of a product or service increases with the increase in a number of users. Network
refers to a common user base that communicates among themselves.
e.g. Facebook, Android phones, Microsoft windows, Whats app
2) Think about the kinds of technology projects you own. What sorts of switching costs are inherent in each of these? Are these strong switching costs or weak switching costs? What would it take for you to leave one of these services and use a rival? How might a competitor try to lessen these switching costs to persuade you to adopt their product?
I use Facebook, android phones, Whatsapp.
Switching costs are high because users of these platforms have to lose a lot of other fiends and their data . It will be difficult to force the others also to migrate to a new platform .Most people are accustomed to the user interface and features available on these platforms and hence would not willing to move. Also these platforms offer features like a one stop shop, for all that is needed for collaboration e.g. sharing of any kind of files. Also certain complementary features can be accessed only through these platforms eg. Android apps and FB apps. A user might be accustomed to such app and may not find s similar one in any other platform eg android app.
Such switching costs are very stronger. If i have to switch to a rival i will have to lose several of the benefits –like huge user base, huge number of complementary benefits(apps) etc
A competitor might offer a product with greater technical value that exceeds the value offered by network effects. He can offer products that cannot be easily imitated or copied by others. They can subsidize the adoption, form alliances with others and encourage complements to develop. Eg. Apple had a good network effect when Android was launched.Google formed alliances with p[hone manufacturers, gave the product(Android OS) at subsidized rate and encouraged app developers to use their platform. Such phones were also sold at a lesser price
They can offer compatibility with already used technology.eg windows can launch a phone with android platform because a huge number of users are using android already . other techniques include Seeding the market with complements ( eg windows media player for windows OS) and Leveraging backward compatibility- apps developed for a previous generation of Android can also be used in phones with new generation operating system)
3) What are the reasons it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present? What is technological leap-frogging and why is it so difficult to accomplish?
Existing companies have already erected high barriers to entry using network effects- exchange, switching costs staying power, complements. Customers are already accustomed to the existing features of the technology and are already experiencing the huge network benefits. So it is difficult to make the customers migrate to new players
Technological leapfrogging is competing by offering a superior generation of technology compared to the existing in the market. It is difficult to accomplish because the competing firm offering this new technology has to exceed
4) What tactic might an established firm employ to make it impossible, or at least difficult, for a competitor to gain access to, or become compatible with, their product or service?
5) How do Apple, Microsoft, and Facebook encourage the development of complementary products?
Microsoft and Apple – helps developers to sell their products on Xbox Live marketplace and iTunes, respectively. This helps the developers get access to huge number of customers at a free cost. Venture funds can also prompt firms to create complementary goods. Facebook launched the FB Fund, that invested ten million dollars in start-ups that create apps for FB
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