gaming system which video game system do you have? –why did you buy that brand? which car do you...

Gaming system

• Which video game system do you have?– Why did you buy that brand?

• Which car do you have?– Why did you buy that brand?

• Washing Machine?– Why did you buy that brand?

Network Externalities

• Phones, Faxes, e-mail, etc. all have the following property: – Network externalities: The more people using it the

more benefit it is to each user.

• Computers, VCRs, PS2s, also have this property in that both software can be traded among users and the larger the user market, the larger number of software titles are made.

• How do markets operate with such externalities?

Competition & Network Externalities

• Individuals 1,…,1000 (call this number v)

• Each can buy one unit of a good providing a network externality.

• Person v values a unit of the good at n v, where n is the number of persons who buy the good.

• Note in the experiment we had v be the max value and true value proportionate (n/1000)*v.

Competition & Network Externalities

• What is the demand at price p?

• If v* is the marginal buyer, valuing the good at nv* = p, then all buyers v’ > v* value the good more, and so buy it.

• Quantity demanded is n = 1000 – v*.

• So inverse demand is p = n(1000-n).

• Graph this!

• What is the supply curve if marginal cost c<250,000?

Competition & Network Externalities

• What are the market equilibria?

• Zero.

• A large numbers of buyers buy.– large n* large network externality value n*v– good is bought only by buyers with n*v p;

i.e. only large v v* = p/n*.• The other point is unstable and called a threshold

point or tipping point. Below this, demand will go to zero. Above this, the product would be a hit.

Solution• If p=160,000, what are the

– Failure equilibrium.– Threshold point.– Success equilibrium.

• In the experiment (treatment 1), we had v be uniform on [0,10] and p=2.4. Actual value was v times fraction, e.g., for 10 people v*(n/10). In this case, what are the– Failure equilibrium.– Threshold point.– Success equilibrium.

Solution: Number of people

• Note that the number of people does not affect the answer.

• N is total number of people. n=(10-v*)(N/10). Or v*=10-10n/N.

• Thus, p= (10-10n/N )(n/N).

• Call z=(10n/N). Substituting yields

• P=(10-z)(z/10)

Solution treatment 2?

• What is the solution for treatment 2?

• We still had a price of 2.4, but values were drawn from [0,7].

Facebook• In Feb 2004, Facebook was launched by Mark

Zuckerberg.

• For 2+ Month prior, he had orally agreed to work for the Winklevoss twins developing the Harvard Connection (which had been in development for 2 years).

• In April 2004, the Harvard Connection was launched and a failure.

• In Sept. 2008, they settled for 65 million dollars.

Discussion points

• Competitors: VHS vs. Beta, Qwerty vs. Dvorak, Windows vs. Mac, Playstation vs. Xbox, Blue-ray vs. HD-dvd.

• Does the best always win?• Standardization helps with network externalities.

– Drive on left side vs. right side. Out of 206 countries 144 (70%) are rhs.

– Left is more nature for an army: swords in right hand, mounting horses. (Napolean liked the other way.)

– Sweden switched from left to right in 1967.

• Lots of networks: Religions and Languages.

Homework.

• Students like to go to the Haifa Ball depending upon how many other students go there.

• Tickets cost 32 NIS each. • There are 1000 students indexed by i from 1 to 1000. • Student i has value vi=i. • Student i has utility (in shekels) for going to the Ball of vi (n/(5000)), ⋅

where n is the total number of students going to the Ball. • (i) If everyone believes n=500, which students will be willing to go to

the ball?• (ii) What is the threshold number of tickets sold above which it will be

a success and below which it will be a failure? • (iii) What is the equilibrium of tickets sold if the ball is a success?• (iv) What is the equilibrium of tickets sold if the ball is a failure?