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Network Goods Are Usually Sold by Monopolies and Oligopolies
The “Best” Product May Not Always Win
Competition Is “For the Market” Instead of “In the Market”
Antitrust and Network Goods
Music Is a Network Good
Takeaway
As of 2014, there were 1.4 billion active users on Facebook. Why post your profile on Facebook? It’s simple: Facebook is where everyone else posts a profile or goes to view profiles. If you are a teenager, unless you want to be a hermit, it is better to belong to the same network as your friends. Similarly, Match.com, the largest Internet dating service, claims to have over 20 million users.1 If you are looking to date or marry, Match.com has the largest selection of potential partners and so you are most likely to use it.
Some markets involve building or coordinating a network, and those markets usually have some special properties. We wrote this book in Microsoft Word and not in some other software package. Why? It’s not that we firmly believe that Word is superior to other programs. In fact, we’ve hardly tried most of the other programs. Instead, we knew that both of us had a copy of Word and we were both familiar with writing in Word. Even more important, we knew that our editor and publisher could work with Word files. Notice that we chose to use Word even though there are other software packages such as OpenOffice that are free.
A network good is a good whose value to one consumer increases the more that other consumers use the good.
In each of these examples, the value of the good depends on how many other people use the good. Facebook, Match.com, and Microsoft Word are all more valuable to one consumer when other consumers also use these goods. Thus, a network good is a good whose value to one consumer increases the more that other consumers use the good.
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These examples hint at some of the interesting features of network goods that we will be exploring in this chapter. When networks are important, we typically see the following:
Features of Markets for Network Goods
Network goods are usually sold by monopolies or oligopolies.
When networks are important, the “best” product may not always win.
Competition in the market for network goods is “for the market” instead of “in the market.”
By the way, did you notice the tension between features 1 and 3? Network goods are often sold by monopolies or oligopolies (feature 1), but competition for these markets can be intense (feature 3). In fact, the tension between these features of network-good markets has led to a debate about when the antitrust laws should be applied to network markets and when potential competition alone is enough to discipline monopolies. We will be looking at this debate at greater length in this chapter. Let’s look at each of these features in turn.