Chapter 4Slide 1 Network Externalities Up to this point we have assumed that peoples demands for a...
12
Chapter 4 Slide 1 Network Externalities Up to this point we have assumed that people’s demands for a good are independent of one another. If fact, a person’s demand may be affected by the number of other people who have purchased the good.
-
Upload
kevin-willis -
Category
Documents
-
view
213 -
download
1
Transcript of Chapter 4Slide 1 Network Externalities Up to this point we have assumed that peoples demands for a...
Chapter 4 Slide 1
Network Externalities
Up to this point we have assumed that people’s demands for a good are independent of one another.
If fact, a person’s demand may be affected by the number of other people who have purchased the good.
Chapter 4 Slide 2
Network Externalities
If this is the case, a network externality exists.
Network externalities can be positive or negative.
Chapter 4 Slide 3
Network Externalities
A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers.
Negative network externalities are just the opposite.
Chapter 4 Slide 4
Network Externalities
The Bandwagon EffectThis is the desire to be in style, to have
a good because almost everyone else has it, or to indulge in a fad.
This is the major objective of marketing and advertising campaigns (e.g. toys, clothing).
Chapter 4 Slide 5
Positive NetworkExternality: Bandwagon Effect
Quantity (thousands per month)
Price($ per
unit)
D20
20 40
When consumers believe more people have purchased theproduct, the demand curve shifts further to the the right .
D40
60
D60
80
D80
100
D100
Chapter 4 Slide 6
Demand
Positive NetworkExternality: Bandwagon Effect
Quantity (thousands per month)
Price($ per
unit)
D20
20 40 60 80 100
D40 D60 D80 D100 The market demandcurve is found by joining
the points on the individual demand curves. It is relatively
more elastic.
Chapter 4 Slide 7
Demand
Positive NetworkExternality: Bandwagon Effect
Quantity (thousands per month)
Price($ per
unit)
D20
20 40 60 80 100
D40 D60 D80 D100
Pure PriceEffect
48
Suppose the price fallsfrom $30 to $20. If there
were no bandwagon effect,quantity demanded would
only increase to 48,000
$20
$30
Chapter 4 Slide 8
Demand
Positive NetworkExternality: Bandwagon Effect
Quantity (thousands per month)
Price($ per
unit)
D20
20 40 60 80 100
D40 D60 D80 D100
Pure PriceEffect
$20
48
BandwagonEffect
But as more people buythe good, it becomes stylish to own it and
the quantity demandedincreases further.$30
Chapter 4 Slide 9
Network Externalities
The Snob EffectIf the network externality is negative, a
snob effect exists.
The snob effect refers to the desire to own exclusive or unique goods.
The quantity demanded of a “snob” good is higher the fewer the people who own it.
Chapter 4 Slide 10
Negative NetworkExternality: Snob Effect
Quantity (thousandsper month)
Price($ per
unit) Demand
2
D2
$30,000
$15,000
14
Pure Price Effect
Originally demand is D2,when consumers think 2000
people have bought a good.
4 6 8
D4D6D8
However, if consumers think 4,000 people have bought the good,
demand shifts from D2 to D6 and its snob value has been reduced.
Chapter 4 Slide 11
Negative NetworkExternality: Snob Effect
Quantity (thousandsper month)2 4 6 8
The demand is less elastic and as a snob good its value is greatly
reduced if more people ownit. Sales decrease as a result.
Examples: Rolex watches and long lines at the ski lift.
Price($ per
unit)
D2
$30,000
$15,000
14
D4D6D8
Demand
Pure Price Effect
Snob Effect
Net Effect
Chapter 4 Slide 12
Network Externalities and the Demands for Computers and Fax Machines
Examples of Positive Feedback Externalities
Mainframe computers: 1954 - 1965
Microsoft Windows PC operating system
Fax-machines and e-mail
