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Micro Chapter 14

TermDefinition
How is the Internet run by oligopoly it is dominated by several oligopolist media companies like Microsoft, Google, Facebook
The dominance of internet oligopolies is explained by -Economies of scale (as you get bigger, total cost goes down) -Network effects (the value of your network depends on the # of users)
Prominent internet businesses have a tendency toward natural monopoly
Strong economies of scale favor a ____ of the industry's output single producer
Economies of Scale among Internet Businesses are a result of these types of costs (2) high fixed costs and low marginal costs
Average total cost per user declines as more people use the product
High Fixed Costs Digital firms incur large costs before products are offered to the public. Costs are fixed without regard to the number of eventual users.
An Internet firm’s cost of serving each new customer is extremely low because: -Software does not degrade or depreciate. -The only associated marginal cost with running software is a negligible amount of electricity. -The marginal cost of transferring data on the Internet is practically zero.
Internet firms with ATC falling steadily toward zero must do two things in order to achieve a profit: -Gain enough users so that ATC per user falls to a low level -Get all of its users to pay a price that exceeds ATC per user
Any attempt to raise price much higher than zero will cause a significant loss of users
Internet firms can cover the high fixed costs of product development by: -Selling Advertising -Selling Data Price Discrimination: -Freemium pricing -In-app purchases -Subtractive Versioning
Zero MC Pricing and Competition Many Internet firms have a significant number of competitors which results in keeping prices low, so that firms must use other strategies to raise revenue.
Network- a group or system of interconnected people/things that facilitate flows of goods, services, or information
Network effect- occurs when the value of the network depends on the number of people connected to it
Positive vs Negative Network Effects when a network's value to each user increases (+) or decreases (-) as more people join the network Network congestion Network pollution Network effects are determinants of demand
Tipping point- when the size of the network grows large enough to incentivize more new users to join.
When networks compete, the presence of positive network effects means that the network with the largest number of users will become the most valuable. Multi-homing or multi-tenanting
(Exponential Scaling for Network Effects) For any number of users n, there will be exactly n (n-1) / 2 connections
Technological lock-in - when network users are unwilling to switch to more efficient or cost-effective products or technology because of the anti-competitive influence of network effects
Network switching costs- perceived practical or financial costs associated with transitioning to a new network
Digital platforms- facilitate interactions between two or more distinct but interdependent groups of users. Ex: Amazon.com, Xbox
The value of digital platforms comes from connecting different groups of people with each other
A digital platform will have an incentive to maximize the size of each of the groups using its platform.
Direct network effect- when an increase in the size of a network causes either benefits or harm to members of the network
Indirect network effect- when an increase in the size of a network causes either benefits or harm to members of the network by affecting the value of another network connected to the platform
Winner-take-all industries- a single monopoly firm dominated its industry with almost uncontestable control
Contestable industries— upstart firms can grow their user bases and gain market share even when dominant firms already enjoy economies of scale and positive network effects.
Dealing with Concentration Takeovers and mergers between digital firms are a matter of special concern.
Created by: Phillies55
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