Answer to Question #195394 in Economics for Jafar suleiman

Question

Explain why the establishment and exploitation of network effects are key elements in the competitive strategy of computer software provider Microsoft Corporation.

Answer 1

Microsoft is a very analytical firm, and thinks of itself as involved in complex strategic games involving many outside agents.

This means, first, that there is a great deal of internal discussion of the theory of behavior of other agents in the marketplace, including customers, competitors (where they exist) and complementors.

Further, many of the documents take as their focus the industry, not the firm, and many of them are quite explicitly theoretical. These foci of the documents arise because Microsoft in part because thinks of itself as a leader relative to other participants in the industry, and thus seeks to understand their reaction function, and in part because, when there is competition, it seeks to understand the dynamic game well enough to take a leadership position in it. The firm’s internal theory is visible because it is used to guide strategic decision-making, and to delegate action by explaining the strategic goals.

Finally, Microsoft views itself as in the business of guiding and leading positive feedback, and is often careful to explain its strategies to suppliers of complements in terms of industry equilibrium.