Ch 7


Terms in this set (...)

Network Effects
"Metcalfe's Law" or "network externalities." When the value of a product or service increases as its number of users expands. Value=(Users)^2
The value derived from network effects comes from these three sources:
Exchange, Staying Power, and Complementary Benefits
Staying Power
Long-term viability of a product or service.
Total Cost of Ownership (TCO)
Economic measure of the full cost of owning a product. Includes direct and indirect costs.
Complementary Benefits
Products or services that add additional value to the primary products or services that make up a network.
Products and services that allow for the development and integration of software products and other complementary goods. Examples: Wii, iPhone, Facebook allow users to create apps.
One-Sided Market
A market that derives most of its value from a single class of users.
Same-Side Exchange Benefits (not on test review)
Benefits derived by interaction among members of a single class of participant.
Two-Sided Market
Network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work. Has more positive feedback loops.
Cross-Side Exchange Benefits (not on exam review)
When an increase in the number of users on one side of the market (console owners, for example) creates a rise in the other side (software developers).
A market where there are many buyers but only one dominant seller.
A market dominated by a small number of powerful sellers.
Positive Feedback Loops (not on exam review)
Where the biggest networks become even bigger.
Technological Leapfrogging (not on review)
Competing by offering a new technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy.
Blue Ocean Strategy
Approach where firms seek to compete and create in uncontested market spaces rather than competing in spaces and ways that rivals have attracted many customers.
When two or more markets once seen as distinctly separate, begin to offer similar features and capabilities.
Envelopment (not on review)
Where a firm seeks to make an existing market a subset of its product offering. Ex. Apple making the iPod into the iPhone.
Backward Compatibility
The ability to take advantage of complementary products developed for a prior generation of technology.
Adaptor (not on review)
A product that allows a firm to tap into complementary products, data, or user base of another product or service.
The Osborne Effect (not on review)
When a firm pronounces a forthcoming product or service and experiences a sharp and detrimental drop in sales of current offerings as customers wait for the new item.
Congestion Effects
When an increasing number of users lowers the value of a product or service. Ex. Twitter is overwhelmed by the traffic of the sight and is unable to support it so it temporarily shuts down.
Products and services that are and are not subject to network effects? Be able to recognize them.
Socks, pancake syrup, water bottles aren'e effected by how many people use them. However, wikipedia articles, social media, and cell phones are. Every product subject to network effects involves some form of exchange.
Three main sources of value for network effects?
Exchange, staying power, and complementary benefits.
What factors contribute to the staying power and complementary benefits of a product or service subject to network effects?
Exchanging information attracts more users, which will attract other firms to develop complementary benefits for that product or service. Users will then invest in the complementary benefits as well, adding to the staying power because of all the switching costs involved.
Difference between one and two sided markets?
One sided markets draw benefits from a single class of users and experience benefits from the exchange between that one group. Two sided markets benefit from the exchanges of two distinct classes of users, where both sides of users being involved is vital to the market.
How does competition in markets where network effects are present differ from competition in traditional markets?
Fiercely competitive and quick moving because of the positive feedback loop. Once there is a major leader, there tends to be a monopoly. Also, the best product does not always win because people are always going to use what has the most network effects,
Why is it so difficult for late moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present?
A bandwagon is already established, and customers are going to join the most popular where they receive the most benefits. Also, because the dominant standard already has such strong network effects (and switching costs), no one is going to switch to the new rival and lose all of those benefits.
Strategies for competing in markets where network effects are present from both incumbent and new market entrant perspective? Examples of firms that have leveraged these strategies to compete effectively.
New market entrant must exceed technical value of the incumbent as well as the value of their network effects and the exchanges, complementary benefits, and staying power that the incumbent holds. The new entrant must also be sure their tech isn't going to be easily copied by the incumbent, because then they will do the same and destroy the newbie. Incumbent must be constantly innovating so no one can keep up or match up to their tech as well as make pronouncements. Both however, to become dominant can: subsidize product adoption, average viral promotion, form alliances, seed the market with complements and encourage their development, maintain backward compatibility.