Consider the market for a single network good and suppose that consumers differ in their
valuation of both the stand-alone and the network benefits (it can indeed be argued that
it is more plausible that a user who has a higher value for the stand-alone component
of a technology also assigns more importance to the size of its network.) To capture this
idea, write the consumers’ utility function for joining the network as U(θ) = θ(a + νne),
where a is the stand-alone benefit, ν > 0 measures the network effect, ne is the expected
number of users joining the network, and θ is uniformly distributed on the unit interval
(i.e. between zero and one).
a) Identify the indifferent consumer for a given price p and a given expected network
size ne.
b) Express the willingness to pay for the nth unit of the good when ne units are
expected to be sold.
a) Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. The Network Effect is a phenomenon where present users of a product or service benefit in some way when the product or service is adopted by additional users.
b) Willingness to pay is the maximum price a customer is willing to pay for a product or service.
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