Microeconomics Quiz 3.1 (based on Principles of Microeconomics by Dirk Mateer and Lee Coppock)

Key Concepts:

Terms in this set (264)

Network externality
Occurs when the number of customer who purchase a good influences the quantity demanded
Often is a factor in whether the resulting market structure is oligopoly
Classic examples include technologies such as cell phones and fax machines
A new technology has to reach "critical" before it is effective for consumers
How useful would a fax machine be if only 10 people had the machine?

Positive network externalities
Bandwagon effect
Individual preferences for a good increase as the number of people buying the good increases
Internet, social networks, cell phones, fax machines, online gaming, video game consoles, fads, night clubs

Negative network externalities
snob effect
Individual preferences for a good decrease as the number of people buying the good increases
Exotic pets and sports cars
Services that are prone to "congestion." Pool, beach, student union gets "too crowded," and you don't want to go.

Switching costs
Costs that are incurred by a consumer when he switches supplies
Another advantage to a firm having a large network
Demand for existing product becomes more inelastic if costs of switching to a new product are higher
Example: cellphone providers
Early termination fees
Free in-network calls
FTC reduced switching costs in 2003 by requiring phone companies to allow a consumer to take their old phone number to a new provider

How does this relate to oligopoly and market power?
The stronger the externality effect, the more market power a firm will have.
First firm into a market grows quickly and captures a large number of consumers
Makes it difficult for smaller rivals to gain market share, or forces them out of the market

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