Core Economics 3e

Network Goods

Multiple Choice Questions

After watching the Network Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. A virtual network is one in which participants are connected because they:

use the same products.

belong to the same country.

belong to the same ethnic group.

are subject to a totalitarian government.

Question

2. For economists, social networks are virtual networks with:

only friends and relatives.

an objective to improve society.

some form of physical connection.

no commercial purpose.

Question

3. In economics, the term network effects, refers to a situation when the use of network goods:

creates physical connections with other users who are using different network goods.

creates increased value for customers and businesses as the network expands.

creates cooperation among competitors producing similar network goods.

allows users to interact with each other, even when separated by a distance.

Question

4. As increasing numbers of users leave a network, the value of the network shrinks at an accelerating rate. This is an example of a:

virtuous cycle.

business cycle.

reduction cycle.

vicious cycle.

Question

5. This figure depicts a network demand curve. The curve declines because:

the network is immature and cannot support a higher price.

prices increase as more users join the network.

firms lower prices to attract casual users.

core users demand lower prices.

Question

6. When two firms’ produce network goods that may be comparable, network effects

ensure that both firms have the same market power in the long run.

ensure that both firms have the same market power in the short run.

can cause one firm to gain and the other firm to lose in terms of revenue.

can cause consumers to quit both networks as competition between the firms is likely to drive up membership rates.

Question

7. A strategy firms with network goods use to attract new consumers is the:

teaser strategy.

lock-in strategy.

connection strategy.

mobility strategy.

True/False Questions

After watching the Network Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. When a firm selling a network good sees its market share grow very quickly, it knows that it is experiencing a virtuous cycle.

True

False

Question

2. Network effects result from an increase in supply adding value for the network’s users and this drives an increase in demand and an increase in price – the opposite of a typical demand curve.

True

False

Question

3. A lock-in strategy is an offer of an attractive upfront deal to entice new customers to join the network because the businesses know that customers will stay in the network for a long time.

True

False

Short Answer/Discussion Questions

After watching the Network Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Explain how Facebook qualifies as a social network from the standpoint of an economist.

Suggested solution: A social network, from an economist’s standpoint, has elements of both a physical network and a virtual network. The virtual element is that Facebook users are using the same social media platform for the connection. The physical element is that most users establish Facebook connections with individuals and businesses with whom they have interactions outside the platform – friends, relatives, and so on. (Answers may vary.)

Question

2. Describe a lock-in strategy that might be used by a company to protect the market share of its network good.

Suggested solution: When cell phone companies require a two year contract, or a cable company provides a discount for buying Internet service as well as cable TV service, the companies are trying to require (contract) or entice (bundle discount) customers to stay with the firm as long as possible. This is so the firm can derive the network effect benefits from the customer as long as possible. (Answers may vary.)

Question

3. Why would a popular musician make songs for a new, yet to be released, album available today with no charge to listeners on a streaming service?

Suggested solution: This is a form of advertising that is designed to use word of mouth and social media to promote the upcoming album. The strategy is to create excitement about the music and also to create a desire to own the album. This increases the demand for the album and increases the expected sales. (Answers may vary.)