Network effects
3 important questions on Network effects
What is the Derivative Utility Value dependent on? What is it independent of?
Derivative Utility Value:
- Depends on actual and future diffusion of the product
- Independent of evaluation of product attributes by user
What are the managerial implications in markets with network effects in terms of product?
- Product:
- Superior quality and high degree of innovativeness attract new users
- Lead users take higher consumption risks
- Lead user communicate positive expectations - band waggon effect
- Product compatibility; Standardization which increases utility value
- Increase of higher installed base
- Protection of installed base
Entry barriers/ Switching barriers are deminished with non-protectable standards
Diffussion of superior non-compatible technologies avoided
What are the managerial implications in markets with network effects in terms of price?
- Price
- Price is a strategic management decision; Dynamic
- Limit pricing (price < margial cost) in early stage successfull
- Later price increases for imitators can subsidize early loses
Assumptions about usage intensity and willingness to pay of future customers must be realistic
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