Deck 13: Strategy in Networked Industries

Question 1

In industries based on decreasing returns, what you earn on the marginal product increases with the volume of output

Answer 1

False

Question 2

In a business with decreasing returns, you initially get a high return on the marginal product produced but, as time passes, your costs increase with the volume you produce, leading to decreasing marginal returns.

Answer 2

True

Question 3

One reason industries experience increasing returns when upfront costs are low and marginal costs are high is because unit costs drop dramatically as volume increases.

Answer 3

False

Question 4

Network externalities exist when the purchase of a product by a new customer creates additional value for existing customers.

Question 5

Indirect network effects are network externalities that come from the direct interaction of users.

Question 6

Metcalfe's law states that the value of a telecommunications network is proportional to the cube of the number of devices on that network.

Question 7

Complementary products are used along with the focal product and increase a product's value.

Question 8

An example of direct network effects is when the value of a DVD player increases with the number of movies that you can watch on it.

Question 9

Indirect networks are often complex because network effects can influence suppliers as well as customers.

Question 10

Networked industries account for the majority of the revenue from 60 of the top 100 companies.

Question 11

When a network is shared, maintaining the platform is easier than if it's maintained by one firm.

Question 12

Facebook.com had more viewers in May 2006 than any other social networking site.

Question 13

When Palm Computing worked to get developers to write software for its operating system, they were attempting to create indirect network effects.

Question 14

If you operate in an industry based on increasing returns you should start small and build over time.

Question 15

In an industry based on increasing returns, starting large and targeting a large market creates huge core rigidities for a company.

Question 16

For start-ups in an industry based on increasing returns, bootstrapping is a very effective way of raising the required funds.

Question 17

Although building a large installed base can be effective, it has the tendency to make your product less attractive to the providers of complementary products.

Question 18

A large installed base has the tendency to push you down the learning curve.

Question 19

Building an installed base quickly will keep out competition by creating a positive feedback loop that is hard for competitors to break.

Question 20

The use of bundling is particularly helpful in building your installed base if the bundled products are not complementary.

Question 21

Customer lock-in occurs when customers view the costs of switching supplies as too high to justify doing so.

Question 22

Hewlett-Packard uses razor-razor blade pricing by selling its printers at a loss to get customers to purchase them and make profits off the sale of ink cartridges.

Question 23

In order to be a first mover in an industry with increasing returns, you need to use contractual mechanisms to create the business's value chain.

Question 24

What is most likely to occur in an industry based on decreasing returns?

A) what you earn on your marginal product declines as volume of output increases
B) what you earn on your marginal product increases as volume of output increases
C) what you earn on your marginal product declines as network externalities increase
D) what you earn on your marginal product increase as network externalities increase

Question 25

What is most likely to occur in an industry based on increasing returns?

A) what you earn on your marginal product declines as volume of output increases
B) what you earn on your marginal product increases as volume of output increases
C) what you earn on your marginal product declines as network externalities increase
D) what you earn on your marginal product increase as network externalities increase

Question 26

Which of the following firms is least likely to have increasing returns?

A) pharmaceuticals
B) telecommunications
C) mining
D) computers

Question 27

What type of returns would you expect from an Internet auction house like eBay?

A) constant returns
B) increasing returns
C) decreasing returns
D) impossible to tell

Question 28

If a firm has increasing returns, what can be expected if sales and customers increase?

A) costs increase, prices remain constant, marginal returns decreases
B) cost increase, prices increase, marginal returns remain the same
C) costs decrease, prices decrease, marginal returns remain the same
D) costs decrease, prices remain constant, marginal returns increase

Question 29

Why are high-technology industries likely to show increasing returns?

A) when upfront costs are high and marginal costs are high, unit costs drop as volume increases
B) due to a steep learning curve, as a firm produces more, its cost increase
C) network externalities allow the company to raise prices as they sell more
D) all of the above

Question 30

What is the reason why the drug industry is likely to show increasing returns?

A) when upfront costs are high and marginal costs are low, unit costs drop as volume increases
B) network externalities allow the company to lower prices and sell more
C) due to a steep learning curve, as a firm produces more, its costs decrease
D) all of the above

Question 31

When do network externalities exits?

A) when the purchase of a product by an existing customer creates additional value for existing customers
B) when the purchase of a product by an existing customer creates additional value for a new customer
C) when the purchase of a product by a new customer creates additional value for existing customers
D) when the purchase of a product by a new customer creates additional value for new customers

Question 32

According to Metcalfe's law, the value of a telecommunications network is proportional to the ___________ of the number of devices on that network.

A) equivalent
B) square root
C) square
D) cube

Question 33

Network externalities that come from the direct interaction of users are called:

A) complementary products
B) substitute products
C) direct network effects
D) indirect network effects

Question 34

What is a situation called in which the purchase of a product by a new customer increases its value to existing customers?

A) installed base
B) direct network effects
C) indirect network effects
D) network externalities

Question 35

Network externalities that develop when the presence of complementary products are called:

A) direct network effects
B) indirect network effects
C) complementary products
D) substitute products

Question 36

According to Metcalfe's law if you have a network of 10 users and you add another, how much have you increased the value to the users?

A) 1 percent
B) 10 percent
C) 21 percent
D) 30 percent

Question 37

How do complementary products increase a focal products value?

A) because the product is less useful if the complement is not present
B) because the product is less useful if the complement is present
C) because the product is more useful if the complement is not present
D) because the product is more useful if the complement is present

Question 38

What type of effect is occurring when the value of a video game console increases with the number of games that you can play on it?

A) direct
B) indirect
C) functional
D) dysfunctional

Question 39

What type of effect is occurring when the value of a DVD player increases with the number of movies that you can watch on it increases?

A) direct
B) indirect
C) functional
D) dysfunctional

Question 40

What condition is consistent with an indirect network effect?

A) complementary products don't affect the focal product's functionality, but do make it more desirable
B) complementary products don't affect the focal product's functionality and make it less desirable
C) complementary products affect the focal products functionality and make it more desirable
D) complementary products affect the focal products functionality, but make it less desirable

Question 41

Networked industries account from the majority of revenue of what percentage of the top 100 companies?

A) 10 percent
B) 30 percent
C) 50 percent
D) 60 percent

Question 42

What is a strategic issue associated with network effects?

A) maintenance of the network
B) the possibility of sustaining more than one network
C) competition that occurs outside the network
D) all of the above

Question 43

What strategic issue associated with network effects is exemplified by Apple and the Macintosh computer?

A) maintenance of the network
B) the possibility of sustaining more than one network
C) use of strategic action to exploit network effects
D) all of the above

Question 44

Which network had the most U.S. visitors in May 2006?

A) Facebook.com
B) Myspace.com
C) Friendster.com
D) Classmates.com

Question 45

Which network had the greatest increase in U.S. visitors from May 2005 to May 2006?

A) Facebook.com
B) Myspace.com
C) Frienster.com
D) Classmates.com

Question 46

Which network had, but lost, the lead in number of U.S. visitors between May 2005 and May 2006?

A) Facebook.com
B) Friendster.com
C) Classmates.com
D) Myspace.com

Question 47

What was Palm Computing attempting to exploit by creating a beaming capability that allowed information to be transferred between Palm PDAs?

A) decreasing returns
B) economies of scale
C) indirect effects
D) direct effects

Question 48

What was Palm Computing attempting to exploit by working to get developers to write software for its operating system?

A) decreasing returns
B) economies of scale
C) indirect effects
D) direct effects

Question 49

What strategic action to exploit network effects was exemplified by Microsoft overtaking RealNetworks' lead in the streaming media market by bundling its media player with its PC operating system?

A) maintenance of the network
B) competition that occurs outside the network
C) the possibility of sustaining more than one network
D) use of strategic action to exploit network effects

Question 50

In general, what is required in increasing return industries in order to be successful?

A) establish smaller-scale operations
B) build your established base over time
C) be a first mover
D) all of the above

Question 51

What tends to happen in industries based on increasing returns?

A) monopolies develop
B) perfect competition develops
C) oligopolies develop
D) impossible to tell

Question 52

What is usually required in industries based on increasing returns?

A) attract customers and profits first
B) attract customers first and profits later
C) make profits first and attract customers later
D) make profits later and attract customers later

Question 53

What is usually required in industries based on increasing returns?

A) remaining flexible
B) delaying action
C) developing core rigidity
D) preserving options

Question 54

What is most likely to happen over time in industries based on increasing returns?

A) need to raise large amounts of money and a decreasing ownership share
B) need to raise large amounts of money and an increasing ownership share
C) need to raise less money and a decreasing ownership share
D) need to raise less money and an increasing ownership share

Question 55

Why is it important to build a large installed base quickly in an industry based on increasing returns?

A) more likely to make the product the industry standard
B) more likely to make the product more attractive to the providers of complementary products
C) pushes the company down the learning curve
D) all of the above

Question 56

What advantage associated with building a large base is demonstrated by Microsoft being able to recoup its development costs faster than Apple?

A) keeping competition in a positive feedback loop
B) pushing the company down the learning curve
C) making your product the industry standard
D) improving the economics of developing new technologies

Question 57

What can be done to increase your installed base quickly in an industry based on increasing returns?

A) use penetration pricing
B) bundling your product with other products already popular with customers
C) target the mass market from the start
D) all of the above

Question 58

What method of increasing the installed base did PayPal use when they gave $10 to all new customers?

A) penetration pricing
B) bundling
C) targeting the mass market
D) customer lock in

Question 59

What method of increasing the installed base did Microsoft use when it included its Internet software with other applications?

A) penetration pricing
B) bundling
C) targeting the mass market
D) customer lock in

Question 60

What is called when customers view the costs of switching suppliers as too high to justify doing so?

A) penetration pricing
B) bundling
C) targeting the mass market
D) customer lock in

Question 61

What is it called when you create a unique system composed of a base product and additional components that are not compatible with your competitor's base product?

A) customer lock in
B) razor-razor blade pricing
C) penetration pricing
D) bundling

Question 62

What is Hewlett-Packard using when they sell their printers at a loss in order to make a profit on the sale of ink cartridges?

A) bundling
B) customer lock in
C) razor-razor blade pricing
D) penetration pricing

Question 63

What is Microsoft using when it sells its Xbox consoles at below cost in order to make profits on game software?

A) razor-razor blade pricing
B) bundling
C) customer lock in
D) penetration pricing

Question 64

How was eBay able to remain ahead of its competition as an Internet auction house?

A) using penetration pricing
B) bundling the software
C) customer lock in
D) being a first mover

Question 65

Explain why some industries display decreasing returns while others exhibit increasing returns.

Question 66

Compare and contrast direct and indirect network effects.

Question 67

Explain how firms can use network effects to their strategic advantage.

Question 68

Explain that starting large can be effective at increasing returns.

Question 69

Explain why building your installed base quickly is crucial in a business based on increasing returns.

Question 70

Describe why it's important to get customers to lock in to your product.

Question 71

Explain what is necessary to do to be a first mover in an industry based on increasing returns.