Microeconomics of Network Markets

In: Business and Management

Submitted By syzhang
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WEEK 7: Network Markets & Disruptive Technological Changes
(Microsoft in Thailand, Motorola/Noka)

Network Markets – S-curve of P(join) vs. installed base
• Tipping depends on taste for variety vs. network externalities o Adjusted price adjusted for market share
• Direct network effects – benefit of more users. Indirect effects – Growth of complementary products and services on the larger platform (iPhone, HD-DVD)
• Use switching cost to lock in early market share gains, create competition through licensing

Disruptive Technological Changes
Timing is everything, incumbency power diminished, harder to manage judo attacks

Innovate Inside
• Incumbency advantage of size, market knowledge, reputation/brand recognition, experience, access to funding, distribution & supplier resources
• Incumbents face replacement effect – new product cannibalizes profits from established markets, but this ignores the competition effect - innovators will enter and undermine his franchise, so incumbent might as well preempt by innovating.
• Network effects/uncertainty about tipping + increasing returns/internal hurdle rate is a virtuous cycle that is challenging to incumbent’s desire to invest Wait and See – Jump on the bandwagon if innovation proves viable
• Network effects and other customer lock-in – challengers may convert early lead into sustainable advantage
• If early advantage can be neutralized, then this strategy has real option value
• Can the threat be isolated into a niche from which a price war is unlikely to spread? If so, create fighter brand – thwart rival’s entry into a low-end market segment, implement price discrimination and increase share, leverage strategic advantages (brand, distribution)

M&A – acquired new tech by acquiring the innovators
• Info gathering about new market & tech opportunities, use small companies as “feelers”
• How…...

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