Question

What is a network externality? How does a network externality serve as a barrier to entry? Is this barrier surmountable? Provide one example. Make sure you carefully explain your answer. – Maximum number of words 120

Answer 1

Network externalities are the impact that a product or service has on a consumer while others use the same products or services that are compatible. There are positive network externalities when the benefits (or, more technically, marginal utility) are an increasing feature of other users. If the benefits are an increasing function of the number of other users, negative network externalities occur.

Externality of the network exists where the product's utility grows with the number of people using it. It can serve as a barrier to entry because brand popularity attracts more customers that supplier supremacy in the market this barrier is not insurmountable, if competitor enters the market with superior product customers can turn to superior product.

Of example, Facebook is likely to create beneficial network externalities because if more users use it as well, it is more valuable for a client. On the other side, a road can impart negative network externalities as a vehicle on the road causes congestion for other road drivers.

The externality of the network was described as a shift in the profit or surplus an agent derives from a good when the amount of other agents consuming the same kind of good changes. For example, as fax machines are becoming more popular, your fax machine is becoming increasingly valuable as you will be using it more. By theory, it allows the price that consumers obtain to be divided into two separate parts. One element that we called the autarky value in our writings is the value that the item produces even if there are no other users.The second component, which we called the synchronization value, is the additional value generated from being able to interact with other product users, and the nature of network effects is this latter value.