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

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

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

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

6. When one mails a letter to a foreign destination, what are the essential facilities involved and why is interconnection needed?

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. 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. 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. 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. 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. 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?

13. When Google Apps launched almost a decade ago, it revolutionized the software industry. No longer was software confined to a single computer. Instead, apps are stored online allowing users to access documents and spreadsheets wherever they go. Google’s market dominance did not last forever, as Microsoft’s Office 365’s market share surpassed Google’s in 2015. What were some advantages of Office 365 that allowed it to gain market share so quickly against a market leader? When Google responded by eliminating fees by Office 365 users to switch to Google Apps, what strategy was Google employing?

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?

15. Suppose Caroline values video game X at $70 and video game Y at $30, whereas Jacqueline values video game X at $30 and video game Y at $60. 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. 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. According to By the Numbers, in what month and year did Uber surpass taxi services as the most popular form of local transportation? How much did Uber’s market share increase from the beginning of 2014 to the end of 2015?

18. Compare the growth in Airbnb home-sharing guests from 2012 to 2015 with Uber’s growth in users from 2014 to 2015. What are the similarities in how these different industries achieved such dramatic increases in market share in such a short period of time?