Answer to Question #178461 in Macroeconomics for Shreya Mishra

Question

Competition authorities increasingly consider the concept of network effects. Explain what network effects are & an e.g of a market where these might exist. What outcomes might you expect in a market with network effects, & what competition problems might arise?

Answer 1

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Network effects is a phenomena in which the value or utility a user derives from a good or service depends on the user number of the very compatible products.

majority of network effects are positive, resulting in a given user getting more benefit from a brand as more users enter the same platform. Application of a brand by a new user has two effects: an increase in the appeal of the product to all other consumers and an increase in the willingness of other non-users to use it .

for example :

Financial market.

Cryptocurrencies are a form of digital currency.

Network effects are also present in cryptocurrencies such as Bitcoin. Bitcoin's unique properties appeal to both users and investors, and the more users who enter the network, the more stable it becomes thus high utility to owners .A network effect can occur as the network and culture expand, making it more possible for new people to join. Furthermore, as more people use Bitcoin, it becomes more important financially.

In a market with network effects there is expected to be more market stability hence increased market segment/share with increase in utility .

in a market with network effects there would be unfair competition due to likeliness of monopoly to exist.

Poor quality products and service delivery in the long run.