MIS 301 Chapter Notes - Chapter 6: Network Effect, Complementary Good, Switching Barriers

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Chapter 6: Understanding Network Effects
1. Network effects:
a. Definition: when the value of a product or service increases as the number of users grow
b. One of the most important reasons you pick one product over another
c. Examples: Microsoft, eBay, Facebook and Visa
d. Value from network effect:
i. Exchange: every product or service subject to network effects fosters some kind
of exchange
ii. Staying power: the long-term viability of a product
1. No one wants to buy a product that is likely to go away
2. Networks with more users have stronger staying power
3. How it relates to switching costs: you invest time in learning how to use
a sste; if the sste is’t supported aore, the iestet is lost
iii. Complementary Benefits: products or services that add additional value to the
1. Products that encourage others to offer complementary goods are
called platforms
2. Letting others contribute to your platform can be a good strategy
a. Their time and money is invested to enhance your products
b. i.e. APPLE applications, speakers, etc
iv. Exchange of info attracts more users and firms that offer complementary
products. When firms develop complementary products and users buy these
products switching costs and enhanced staying power
2. Types of markets
a. One-sided market: a market that derives most of its value from a single class of users
i. Same-side exchange benefit: benefits derived by interaction among members of
a single class of participant
1. i.e. Instant messaging: network effect derived only from one class of
usersthe IMers
b. Two-sided market: network markets comprised of two distinct categories of
participants, both of which are needed for the network to work
i. i.e. Video games: more players more developers more players
ii. Cross-side exchange benefit: when an increase in the number of users on one
side creates a rise on the other side
c. Network markets:
i. Often experience early, fierce competition
1. Leaders emerge in the market among many rivals
2. Positive feedback loop inherent network effects causes this
ii. Monopolistic tendencies
1. Monopoly: a market with many users but only one dominant seller
iii. Winning customers away from major players requires:
1. Exceed the value of the technical features
2. +the alue of the iuet’s ehage
3. +switching costs
4. +complementary product benefit
5. And the incumbent must not be able to copy the new product
iv. Technological leapfrogging: competing by offering a superior generation of
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