Questions and Problems

Check Your Understanding

1. Question

   What is a network externality and how does it differ from a typical externality?

   Prob 14 1. What is a network externality and how does it differ from a typical externality?

2. Question

   Explain why a network demand curve slopes upward for small quantities.

   Prob 14 2. Explain why a network demand curve slopes upward for small quantities.

3. Question

   List three strategies a firm can use to segment its market for a network good.

   Prob 14 3. List three strategies a firm can use to segment its market for a network good.

4. Question

   True or False: Once a firm’s network good becomes the market leader, it is extremely unlikely for the firm to lose that position within a five-year period. Explain.

   Prob 14 4. True or False: Once a firm’s network good becomes the market leader, it is extremely unlikely for the firm to lose that position within a five-year period. Explain.

5. Question

   Why does the 3DTV industry exhibit large economies of scale? Would there also be network externalities in the consumption of 3DTVs? Explain.

   Prob 14 5. Why does the 3DTV industry exhibit large economies of scale? Would there also be network externalities in the consumption of 3DTVs? Explain.

6. Question

   If Matt wants to use his AT&T iPhone to call his girlfriend Sue, who uses a MyTouch from T-Mobile, why is interconnection necessary for the call to be completed?

   Prob 14 6. If Matt wants to use his AT&T iPhone to call his girlfriend Sue, who uses a MyTouch from T-Mobile, why is interconnection necessary for the call to be completed?

Apply the Concepts

7. Question

   Suppose that two community organizations each plan their own public beach volleyball tournament on the same day at the same beach. Each organization wishes to have as many participants as possible. Further, a larger tournament is more fun for the participants. Suppose that a team consists of four players and at least four teams are required to hold a tournament. Explain what the tipping point would be and why a vicious cycle can develop if that number fails to be achieved.

   Prob 14 7. Suppose that two community organizations each plan their own public beach volleyball tournament on the same day at the same beach. Each organization wishes to have as many participants as possible. Further, a larger tournament is more fun for the participants. Suppose that a team consists of four players and at least four teams are required to hold a tournament. Explain what the tipping point would be and why a vicious cycle can develop if that number fails to be achieved.

8. Question

   If a person decides to unsubscribe from a popular social network, it decreases the value of the network to everyone else. Why wouldn’t this action be considered a negative externality?

   Prob 14 8. If a person decides to unsubscribe from a popular social network, it decreases the value of the network to everyone else. Why wouldn’t this action be considered a negative externality?

9. Question

   Suppose that expansion of the productive capacity of a firm producing a network good reduces the average cost due to economies of scale, but generates a very large increase in demand due to the network effect. Is this good likely to be on the upward-sloping or downward-sloping portion of the network demand curve? Explain.

   Prob 14 9. Suppose that expansion of the productive capacity of a firm producing a network good reduces the average cost due to economies of scale, but generates a very large increase in demand due to the network effect. Is this good likely to be on the upward-sloping or downward-sloping portion of the network demand curve? Explain.

10. Question

    Suppose that a new Harry Potter book called The Untold Stories of Harry Potter is released for sale, and fans line up for days to be the first to buy it. Are these fans core users or casual users in their demand for the new book? How could the book publisher maximize its profit using intertemporal pricing?

    Prob 14 10. Suppose that a new Harry Potter book called The Untold Stories of Harry Potter is released for sale, and fans line up for days to be the first to buy it. Are these fans core users or casual users in their demand for the new book? How could the book publisher maximize its profit using intertemporal pricing?

11. Question

    Suppose that your bank opens up a dozen more automatic teller machines (ATMs) throughout the city, making it much easier to find one. What happens to the demand and supply curves for this network as it expands?

    Prob 14 11. Suppose that your bank opens up a dozen more automatic teller machines (ATMs) throughout the city, making it much easier to find one. What happens to the demand and supply curves for this network as it expands?

12. Question

    Whenever a new car with satellite radio capability is purchased, the buyer is typically offered a free 90-day subscription to a satellite radio service such as SiriusXM. Explain why this offer would be considered a teaser strategy. Why wouldn’t SiriusXM just charge a monthly subscription fee from the start?

    Prob 14 12. Whenever a new car with satellite radio capability is purchased, the buyer is typically offered a free 90-day subscription to a satellite radio service such as SiriusXM. Explain why this offer would be considered a teaser strategy. Why wouldn’t SiriusXM just charge a monthly subscription fee from the start?

In the News

13. Question

    The 2006 introduction of Google Docs, an online alternative but compatible software to Microsoft Office, forced Microsoft to develop new ideas to maintain its dominant market share. BBC News (May 12, 2010) reported that “Microsoft Takes Aim at Google Docs” by introducing a new online component with its Office 2010 product that offers the same features as Google Docs but with the familiarity of the Office software format. Why would the ability of Google Docs to read and edit a file created using Microsoft Office potentially cause the price of Microsoft Office software to fall?

    Prob 14 13. The 2006 introduction of Google Docs, an online alternative but compatible software to Microsoft Office, forced Microsoft to develop new ideas to maintain its dominant market share. BBC News (May 12, 2010) reported that “Microsoft Takes Aim at Google Docs” by introducing a new online component with its Office 2010 product that offers the same features as Google Docs but with the familiarity of the Office software format. Why would the ability of Google Docs to read and edit a file created using Microsoft Office potentially cause the price of Microsoft Office software to fall?

14. Question

    Internet interconnection has become an important issue as countries improve their network infrastructure. According to the International Charging Arrangements for Internet Services (ICAIS) agreement, countries wishing to access U.S. Web sites or use U.S. backbones (Internet networks) must pay the full cost of interconnection (as opposed to, say, telephone interconnection, where each side shares the cost). Why would a country agree to this type of arrangement in the first place (in the 1990s), and what developments have taken place since then that would cause them to now oppose this arrangement?

    Prob 14 14. Internet interconnection has become an important issue as countries improve their network infrastructure. According to the International Charging Arrangements for Internet Services (ICAIS) agreement, countries wishing to access U.S. Web sites or use U.S. backbones (Internet networks) must pay the full cost of interconnection (as opposed to, say, telephone interconnection, where each side shares the cost). Why would a country agree to this type of arrangement in the first place (in the 1990s), and what developments have taken place since then that would cause them to now oppose this arrangement?

Solving Problems

15. Question

    Suppose Ben values video game X at $100 and video game Y at $20, whereas Paul values video game X at $30 and video game Y at $80. The marginal cost to produce each game is $0. If a firm that produces both games decides to bundle X and Y, what price should it charge, and why is this bundling strategy more profitable than selling each game separately at a single price (assuming price discrimination is not possible)?

    Prob 14 15. Suppose Ben values video game X at $100 and video game Y at $20, whereas Paul values video game X at $30 and video game Y at $80. The marginal cost to produce each game is $0. If a firm that produces both games decides to bundle X and Y, what price should it charge, and why is this bundling strategy more profitable than selling each game separately at a single price (assuming price discrimination is not possible)?

16. Question

    The accompanying figure shows two demand curves for ski lift tickets, one representing demand during February (peak season) and the other for April (low season). If the ski resort wishes to maximize its profit using peak-load pricing, what price should the ski resort set for lift tickets in February and what price should it set in April?
    

    
    
    
    

    Prob 14 16. The accompanying figure shows two demand curves for ski lift tickets, one representing demand during February (peak season) and the other for April (low season). If the ski resort wishes to maximize its profit using peak-load pricing, what price should the ski resort set for lift tickets in February and what price should it set in April?

17. Question

    According to By the Numbers, by what age category does the typical individual perceive television to be harder to live without than a mobile phone? By what age category does television become harder to live without than a computer?

    Prob 14 17. According to By the Numbers, by what age category does the typical individual perceive television to be harder to live without than a mobile phone? By what age category does television become harder to live without than a computer?

18. Question

    According to By the Numbers, in what year did Microsoft Word surpass WordPerfect in terms of market share? In what year did Google Docs surpass WordPerfect? What are the current trends (up or down) for each software program in the last year reported?

    Prob 14 18. According to By the Numbers, in what year did Microsoft Word surpass WordPerfect in terms of market share? In what year did Google Docs surpass WordPerfect? What are the current trends (up or down) for each software program in the last year reported?