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Chapter 10: Problem 2

What are network externalities? For what types of products are network externalities likely to be important? What is path dependence?

Short Answer

Expert verified
Network externalities occur when a product's value increases as more people use it, and they're common in digital goods and communication services. Path dependence is the influence of historical events on the current status, even if those events are no longer relevant.

Step by step solution

01

Define Network Externalities

Network externalities occur when the value of a product or service increases for both new and existing users as more people use it. This concept is often observed in digital and communication goods. For example, the value of owning a phone increases as more people have phones, because there are more people you could potentially call.
02

Identify Products with Network Externalities

Products or services that exhibit network externalities are usually those that rely on a critical mass of users. They include social networks (like Facebook or Instagram), communication devices and services (like telephones and email), digital platforms (like Amazon or Airbnb), and software systems (like Windows or iOS). In each case, the utility of the product or service increases as more people use it.
03

Define Path Dependence

Path dependence is the idea that the state of things in the present is heavily influenced by the events that led up to it, even if those past events are no longer relevant. In the context of network externalities, path dependence could mean that certain technology that may not be the absolute best survives because it was adopted by a larger number of users early on. A good example is the QWERTY keyboard, which was designed to slow down typists and prevent typewriter keys from jamming - even though there's no need for that design today, it's the standard due to path dependence.

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Most popular questions from this chapter

In an article in the Quarterly Journal of Economics, Ted O'Donoghue and Matthew Rabin made the following observation: "People have self-control problems caused by a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate." What do they mean by people's "long-run selves"? Give two examples of people pursuing immediate gratification that their longrun selves would not appreciate.

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