Ch. 8 Network Effect

Adobe gives away the Acrobat reader to build a market for sale of software that creates Acrobat files. This is an example of:

Firms giving away from for half of a two sided market to seed the market

The higher the value of a user's overall investment, the more likely they are to consider the staying power of any offering before choosing to adopt it

True

American Express, a credit card firm, provides services to consumers that include plastic cards, individual accounts, a phone-based customer service. It also provides merchants with services, such as terminals for authorizing transactions and procedures for submitting charges. Based on the above facts, American Express is said to be in a ____ market

Two sided

Network effects occur when

value of a product or service increases as its number of users expands

Regional anti trust authorities may consider product bundling by dominant firms to be anti competitive

True

Two-sided market:

A network market comprised of two distinct categories of participants, both of which are needed to deliver value for the network to work. In two-sided markets, users gain benefits from interacting with a separate, complementary class of users (for example, in the video game industry console owners are attracted to platforms with the most games, while innovative developers are attracted to platforms that have the most users). When an increase in the number of users on one side of the market (say console owners) creates a rise in the other side (software developers), that's called a cross-side exchange benefit.

One-sided market:

A network market that derives most of its value from a single class of users is often referred to as a one-sided market. In one-sided markets, users gain benefits from interacting with a similar category of users (for example, instant messaging, where everyone can send and receive messages to one another). The network effects derived from a one-sided market are referred to as same-side exchange benefits.

Alpha Systems, a market leader in high end video games, has designed its products such that it is difficult for the consumers to migrate to a rival. Which of the following is true?

Alpha Systems has created customers who are "barnacles"

Which of the following is an example of a measure taken by a firm to encourage the development of complementary goods?

Apple's iTunes that allows developers to sell their product online

Which of the following factors can potentially halt the availability of a firm's product or service?

Bankruptcy

___ is a term used by the trade press and consultants to refer to customers who are tightly anchored to a firm

Barnacles

While Sony and Microsoft focused on the graphics and raw processing power favored by hard core male gamers, Nintendo chose to develop a machine to appeal to families, some, and age groups that normally shunned violent games. The strategy adopted by Nintendo in the above example is the ___ strategy

Blue ocean

Which of the following is an example of a one sided market

Cell phone networks

____ are products or services that add additional value to the primary product or service that makes up a network

Complementary benefits

___ occur when increasing number of users lower the value of a product or service

Congestion Effects

Apple is known around the world as a major PC manufacturer and maker of digital music players. With the introduction of the iTunes effort, Apple now boasts a 75 percent share in digital music sales, in direct competition with the four major record labels in the music injury. This has been possible due to the ____ of Apple's hardware business and the digital music market.

Convergence

Network effects are characterized by a positive feedback loop, where the biggest networks continue to grow bigger. What implication does this positive feedback loop have for network markets?

Early, fierce competition between rivals

Nokia is a cell phone brand that offers digital cameras as a part of its cell phone products. It is now in direct competition with camera brands such as Canon and Sony, and has become the world's largest seller of cameras. This is an example of:

Envelopment

____ is said to occur when one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering

Envelopment

Almost all networks derive most of their value from a single class of users

False

Blue ocean strategy often works best when combined with operational effectiveness

False

Cross side benefits arise due to interaction among members of a single class of participant

False

Envelopment is a management strategy where a dominant firm acquires all the layers in its value chain to increase profitability

False

Firms that constantly innovate do so to develop open standards for competitors to become compatible

False

High switching costs serve to weaken the value of network effects as a value asset

False

In the absence of network effects, the value of a product or service increases as the number of users grows

False

In the context of network effects, the term "network" refers to wireless systems that connect pieces of electronics

False

Startup firms that find new markers attractive but do not yet have products ready for delivery pre announce efforts causing potential adaptors to delay a purchasing decision until the new effort rolls out

False

The natural state of a market where network effects are present is for there to be intense competition between several rivals

False

Apple, which controls over 75 percent of digital music sales, was able to dictate song pricing for years, despite the tremendous protests of the record labels. This implies that...

Firms with strong network effects enjoy substantial bargaining power over partners

If a firm's claim in the blue ocean is based on easily ___ resources, then holding off rivals will be tougher

Imitated

Visualix, a firm that leads the developed world in its sales of video game consoles and related software, has decided to enter the yet untapped market of some developing countries. These countries do not have a well established network to sell such products. Which of the following strategies should Visualix adopt in order to succeed in its new market?

Launch its own retail stores that sell the consoles and the games

Which of the following products or services is not subject to network effects?

Laundry services

Viral promotion involves

Leveraging a firm's customers to promote a product or service

Which of the following terms is used as an alternative to switching costs

Lock in

Microsoft's Live Maps and Virtual Earth 3D was a late entrant to the Internet mapping game. Users had already put in countless hours building resources that meshed with Google Maps and Google Earth. However, by adopting the same keyhole markup language (KML) standard used by Google, any work done by users for Google in KML could be used by Microsoft. What strategy of Microsoft's allowed it to catch up with Google?

Making a new product compatible with the leading standard

Network effects are also known as ___ Law

Metcalfe's

Which of the following factors ensures that a user considers the staying power of a product before adopting it

Moderate

A market where there are many buyers but only one dominant seller is known as

Monopoly

Metcalfe's Law is also known as

Network externalities

A market dominated by a small number of powerful sellers is known as

Oligopoly

A market is said to be ____ if it derives most of its value from a single class of users

One sided

A firm is said to have suffered from the ___ when it pre announces a forthcoming product or service and experiences a sharp and detrimental drop in sales of current offerings as users wait for the new item

Osborne Effect

Windows, OS, iPhones, the Wii, and Facebook's application programming interfaces allow for the development and integration of complementary goods by third parties. Based on this evidence, all these products or services can be said to be

Platforms

____ are products are services that allow for the development and integration of complementary goods

Platforms

Large firms often find new markets attractive, but might not have products ready for delivery. What strategy do such firms use to get potential adopters to delay their purchasing decisions?

Pre announce forthcoming efforts

Which of the following factors represents one of the sources of value derived from network effects?

Staying power

___ involves competing my offering a new technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching costs, and complementary benefits

Technological leapfrogging

The video game business is said to be a two sided market. Customers buy a video game console largely based on number of really great games available for the system. Software developers write games based on

Their ability to reach the greatest number of paying customers

eBay auctions are more books over its portal than any of its rivals. Similarly, Second Life has more virtual storefronts than its rivals. This is bc...

They offer greater market reach and benefits to customers

An instant messaging network is an example of a one sided market

True

Every product of service subject to network effects fosters some kind of exchange

True

Firms that leverage proprietary standards for market dominance do not necessarily inhibit innovation

True

Many firms attempt to enhance their network effects by creating a platform for the development of third party products and services that enhance the primary offering

True

Moving first plays a significant role in markets influenced by network effects

True

Network Effects do not influence all products or services

True

Network effects that attract too many users result n a service being so overwhelmed it becomes unusable

True

If "V" represents the value of a network and "n" the number of users of a network, then Metcalfe's Law is defined by the equation

V=n^2

The rise of social media has made ___ promotion a tool that many firms can exploit

Viral

A(n) ___ is a product that allows a firm to tap into the complementary products, data, or user base of another product or service

adaptor

A firm can spend no money and time yet expect to enhance its offerings by

allowing other firms to contribute to its platform

Customers who owned Nintendo's 8-bit video game console were able to play the same game son the firm's new 16-bit SNES system. There was little incentive for existing Nintendo fans to stick with the firm. Nintendo's offering suffered from a lack of

backward compatibility

Markets are said to undergo convergence when they

begin to offer similar features and capabilities

Profitability of online auctions is derived mainly from selling:

differentiated goods

The video game console market is a network market in which Sony's PlayStation 2 dominated over Microsoft's Xbox offering. This has been possible due to

game developers favoring PS2 for its larger user base

Worldwide auction leader eBay started operations in Japan in just five months after Yahoo! launched its Japanese auction service. But eBay was never able to mount a credible threat and edged up pulling out of the market. This example shows that:

it's imperative to move first in markets influenced by network effects

Staying power refers to

long term viability of a product or service

In a market influenced by network effects, the winning product or service is determined by its

technical superiority