Deck 7: Understanding Network Effects: Strategies for Competing in a Platform-Centric, Winner-Take-All World

Question 1

The higher the value of a user's overall investment, the more they are likely to consider the staying power of any offering before choosing to adopt it.

Answer 1

True

Question 2

In the absence of network effects, the value of a product or service increases as the number of users grows.

Answer 2

False

Question 3

Network effects occur when:

A) the utility of large networks, particularly social networks, can scale exponentially with the size of the network.
B) the value of a product or service increases as its number of users expands.
C) people do and believe things merely because many other people do and believe the same things.
D) a concept or idea is repeatedly asserted in a community, regardless of whether sufficient empirical evidence has been presented to support it.
E) money can be made by offering a near-limitless selection of products or services.

Answer 3

B

Question 4

Which of the following terms is used as an alternative to switching costs?

A) Lock-in
B) Complementary benefits
C) Exchange benefits
D) Straddling costs
E) Network impedance

Question 5

Which of the following products or services is not subject to network effects?

A) Banking services
B) Laundry services
C) Video game consoles
D) Social networks
E) Cell phone services

Question 6

_____ is a term used by the trade press and consultants to refer to customers who are tightly anchored to a firm.

A) Butterflies
B) Parasites
C) Sticklers
D) Barnacles
E) Anemones

Question 7

Network effects do not influence all consumer products or services.

Question 8

Metcalfe's Law is also known as:

A) systemic events.
B) cluster effects.
C) group impressions.
D) herd instincts.
E) network externalities.

Question 9

Which of the following factors can potentially halt the availability of a firm's product or service?

A) Lack of competitors
B) Having a critical mass of user support
C) Low prices
D) Strong bargaining power of the firm
E) Bankruptcy

Question 10

In the context of network effects, the term "network" refers to wireless systems that connect pieces of electronics.

Question 11

Alpha Systems, a market leader in high-end video games, has designed its products such that it is difficult for the consumers to migrate to a rival. Which of the following is true about this scenario?

A) Alpha Systems will have low switching costs.
B) Alpha Systems has focused on creating customers who are "butterflies."
C) Alpha Systems has created customers who are "barnacles."
D) Alpha Systems is likely to reduce its staying power in this market.
E) Alpha Systems has focused on reducing "friction" for its end users.

Question 12

High switching costs serve to weaken the value of network effects as a value asset.

Question 13

Every product or service subject to network effects fosters some kind of exchange.

Question 14

Which of the following factors represents one of the sources of value derived from network effects?

A) Congestion
B) Price transparency
C) Information symmetry
D) Staying power
E) Complementary costs

Question 15

If 'V' represents the value of a network and 'n,' the number of users of a network, then according to Metcalfe's Law:

A) V= n2
B) V= 1 / n
C) n= V1 / 3
D) n= 2 / 3V
E) V= 3 / 2n

Question 16

Which of the following factors ensures that a user considers the staying power of a product before adopting it?

A) Monetary savings in the short-term
B) Complementary benefits that add value to the product
C) Value of the user's investment
D) Liquidity of the parent firm
E) Ease of migration to similar products

Question 17

Many firms attempt to enhance their network effects by creating a platform for the development of third-party products and services that enhance the primary offering.

Question 18

Network effects are also known as _____ Law.

Question 19

What are "network effects"? Briefly explain the relevance they hold in an economic context.

Question 20

Staying power refers to the:

A) relative abilities of parties in a situation to exert influence over each other.
B) position of a firm in a competitive landscape that allows it to maintain a positive cash flow.
C) ability of a firm to produce a good or service at a lower opportunity cost than a rival.
D) long-term viability of a product or service.
E) ability to take advantage of complementary products developed for a prior generation of technology.

Question 21

A market dominated by a small number of powerful sellers is known as a(n) _____ .

A) oligopoly
B) pure play
C) short tail
D) blue ocean
E) greenfield

Question 22

A firm can spend no money and time, yet expect to enhance its offerings, by:

A) allowing other firms to contribute to its platform.
B) going public through an initial public stock offering.
C) outsourcing critical processes to third parties.
D) adopting an envelopment strategy.
E) preannouncing a forthcoming product to lower sales of current offerings.

Question 23

The natural state of a market where network effects are present is for there to be intense competition between several rivals.

Question 24

Cross-side benefits arise due to interaction among members of a single class of participant.

Question 25

eBay auctions more books over its portal than any of its rivals. Similarly, Second Life has more virtual storefronts than its rivals. This is because:

A) their offerings are associated with high total costs of ownership.
B) they offer greater market reach and benefits to customers.
C) their respective markets are marked by intense competition between rivals.
D) they have subsidized the initial adoption of their offerings to lure more customers.
E) they enjoy a greater price advantage over their rivals and can leverage this to increase profitability.

Question 26

Network effects are characterized by a positive-feedback loop, where the biggest networks continue to grow bigger. What implication does this positive-feedback loop have on network markets?

A) Formation of alliances to counter the growing influence of dominant firms
B) Early, fierce competition between rivals
C) Loss of revenue for market leaders due to arrival of new entrants
D) Emergence of several firms that constantly swap market dominance
E) Shrinking of market size due to the ambivalent nature of competition

Question 27

_____ are products and services that allow for the development and integration of complementary goods.

Question 28

In a market influenced by network effects, the winning product or service is determined by its technical superiority.

Question 29

Almost all networks derive most of their value from a single class of users.

Question 30

Distinguish between one-sided and two-sided markets. Provide examples for each and mention the benefits derived from these markets.

Question 31

Windows OS, the iPhone, the Wii, and Facebook's application programming interfaces allow for the development and integration of complementary goods by third parties. Based on this evidence, all these products or services are said to be _____.

A) pure plays
B) coopetitors
C) adaptors
D) platforms
E) venture capitalists

Question 32

Firms that leverage proprietary standards for market dominance do not necessarily inhibit innovation.

Question 33

American Express, a credit card firm, provides services to consumers that include plastic cards, individual accounts, and phone-based customer service. It also provides merchants with services, such as terminals for authorizing transactions and procedures for submitting charges. Based on the above facts, American Express is said to be in a _____ market.

A) monopolistic
B) niche
C) captive
D) two-sided
E) contestable

Question 34

An instant-messaging network is an example of a one-sided market.

Question 35

A market is said to be _____ if it derives most of its value from a single class of users.

A) a pure play
B) a long tail
C) core competent
D) one-sided
E) convergent

Question 36

_____ are products or services that add additional value to the primary product or service that makes up a network.

A) Quantum efforts
B) Substitute components
C) Complementary benefits
D) Orthogonal gains
E) Standby additions

Question 37

The video game business is said to be a two-sided market. Customers buy a video game console largely based on the number of really great games available for the system. Software developers write games based on:

A) the technical capabilities that a video game console can provide.
B) the willingness of video game console manufacturers to support their offerings.
C) their ability to reach the greatest number of paying customers.
D) the availability of similar efforts from their competitors.
E) the revenue sharing agreement they are able to reach with the console manufacturers.

Question 38

Which of the following is an example of a one-sided market?

A) Nintendo games
B) Credit card services
C) Operating systems
D) Yellow pages
E) Cell phone networks

Question 39

What are the primary sources of value for network effects? Give a brief description of how each of these factors provides value for network effects.

Question 40

Apple, which controls over 75 percent of digital music sales, was able to dictate song pricing for years, despite the tremendous protests of the record labels. This implies that:

A) despite the presence of network effects, the music industry is not dominated by any single leader.
B) the presence of multiple new entrants forces leading firms to drop prices of their offerings.
C) firms with strong network effects enjoy substantial bargaining power over partners.
D) a dominant market share does not necessarily translate to greater profitability for a firm.
E) firms with significant market share can leverage network effects to overtake prior market leaders.

Question 41

Two distinctly separate markets are said to undergo convergence when they:

A) are dominated by a small group of powerful sellers.
B) derive most of their value from two distinct categories of participants.
C) offer products and services designed to target a specific industry.
D) are characterized by many buyers, but a single, dominant seller.
E) begin to offer similar features and capabilities.

Question 42

A Blue ocean strategy often works best when combined with operational effectiveness.

Question 43

Network effects that attract too many users result in a service being so overwhelmed it becomes unusable.

Question 44

Envelopment is a management strategy where a dominant firm acquires all the layers in its value chain to increase profitability.

Question 45

Regional anti-trust authorities may consider product bundling by dominant firms to be anticompetitive.

Question 46

Worldwide auction leader eBay started operations in Japan just five months after Yahoo! launched its Japanese auction service. But eBay was never able to mount a credible threat and ended up pulling out of the market. This example shows that:

A) online auction markets are characterized by constant shifts in market dominance.
B) market dominance in the global marketplace translates to an equivalent position in national markets.
C) national markets tend to be influenced by factors that are not necessarily localized.
D) it's imperative to move first in markets influenced by network effects.
E) firms should always subsidize initial adoption of their products and make them cheaper than their competitor's products.

Question 47

What are the points that a newcomer to a network effects-dominated market must keep in mind in order to compete effectively?

Question 48

Startup firms that find new markets attractive but do not yet have products ready for delivery preannounce efforts causing potential adaptors to delay a purchasing decision until the new effort rolls out.

Question 49

Explain the nature of competition in markets influenced heavily by network effects.

Question 50

Firms that constantly innovate do so to develop open standards for competitors to become compatible.

Question 51

_____ involves competing by offering a new technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching cost, and complementary benefits.

Question 52

_____ is said to occur when one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering.

A) Acquisition
B) Greenfield investment
C) Envelopment
D) Market leapfrogging
E) Monopolization

Question 53

Viral promotion involves:

A) offering rebates and incentives to customers for adopting a product or service.
B) paying celebrities to use a product visibly to lure customers into unwittingly buying the product.
C) emphasizing customer retention and satisfaction, rather than a dominant focus on sales transactions.
D) leveraging a firm's customers to promote a product or service.
E) sending a pre-written set of messages to customers or prospects over time.

Question 54

The video game console market is a network market in which Sony's PlayStation 2 (PS2) dominated over Microsoft's Xbox offering. This has been possible due to:

A) the low pricing of Xbox which eroded users' confidence in the product.
B) game developers favoring PS2 for its larger user base.
C) the presence of several cheap, rival imitations which ate into Xbox's market share.
D) PS2's technical superiority over the Xbox.
E) the straddling strategy adopted by Microsoft to expand in both video game and DVD player markets.

Question 55

A market where there are many buyers but only one dominant seller is known as a(n) _____.

Question 56

While Sony and Microsoft focused on the graphics and raw processing power favored by hard-core male gamers, Nintendo chose to develop a machine to appeal to families, women, and age groups that normally shunned violent games. The strategy adopted by Nintendo in this example is the _____ strategy.

A) straddling
B) customer engagement
C) blue ocean
D) mass customization
E) convergence

Question 57

Visualix, a firm that leads the developed world in its sales of video game consoles and related software, has decided to enter the yet untapped market of some developing countries. These countries do not have a well-established network to sell such products. Which of the following strategies should Visualix adopt in order to succeed in its new markets?

A) Launch its own retail stores that sell the consoles and the games
B) Sell its consoles at a subsidized price via the existing retail network
C) Use the existing distribution network in order to reduce its entry costs
D) Ensure that its products are sold at a premium price to a niche market in these countries
E) Preannounce its plans to enter these markets

Question 58

Apple is known around the world as a major PC manufacturer and maker of digital music players (iPods). With the introduction of the iTunes effort, Apple now boasts a 75 percent share in digital music sales, in direct competition with the four major record labels in the music industry. This has been possible due to the _____ of Apple's hardware business and the digital music market.

A) straddling
B) convergence
C) diversification
D) customization
E) monopoly

Question 59

Moving first plays a significant role in markets influenced by network effects.

Question 60

Profitability of online auctions is derived mainly from selling:

A) newly released goods.
B) commodities.
C) popular products.
D) trade goods.
E) differentiated goods.

Question 61

The rise of social media has made _____ promotion a tool that many firms can exploit.

Question 62

Microsoft's Live Maps and Virtual Earth 3D was a late entrant to the Internet mapping game. Users had already put in countless hours building resources that meshed with Google Maps and Google Earth. However, by adopting the same keyhole markup language (KML) standard used by Google, any work done by users for Google in KML could be used by Microsoft. What strategy of Microsoft has allowed it to catch up with Google?

A) Making a new market a subset of its main offering
B) Taking advantage of complementary products developed for a prior generation of technology
C) Entering an uncontested, low-profit market instead of competing in saturated, high-profit markets
D) Exchanging technical expertise in one area with another firm to effectively suit resource capabilities
E) Making a new product compatible with the leading standard

Question 63

A firm is said to have suffered from the _____ when it preannounces a forthcoming product or service, and experiences a sharp and detrimental drop in sales of current offerings as users wait for the new item.

Question 64

Which of the following is an example of a measure taken by a firm to encourage the development of complementary goods?

A) Adobe giving away the Acrobat Reader for free
B) Microsoft bundling new products into Windows, Internet Explorer browser, and other offerings
C) Google's support of the Open Social standard for social networking
D) Apple's iTunes that allows developers to sell their products online
E) Nintendo's Wii games targeted at families, women, and older age groups

Question 65

Large firms often find new markets attractive, but might not have products ready for delivery. What strategy do such firms use to get potential adopters to delay their purchasing decisions?

A) Preannounce forthcoming efforts
B) Make their new products compatible with the leading standard
C) Spread costs across increasing units of production or in serving multiple customers
D) Give away products for half of a two-sided market to seed the market
E) Leverage customers of their other products to promote a new product

Question 66

_____ occur(s) when increasing number of users lower the value of a product or service.

A) Network internalities
B) Market inflexibility
C) Congestion effects
D) Backward incompatibility
E) Convergence

Question 67

Customers who owned Nintendo's 8-bit video game console were unable to play the same games on the firm's new 16-bit Super Nintendo system. There was little incentive for existing Nintendo fans to stick with the firm. In this case, Nintendo's new offering suffered from a lack of:

A) switching costs.
B) backward compatibility.
C) staying power.
D) effective pricing.
E) network effects.

Question 68

Nokia is a cell phone brand that offers digital cameras as part of its cell phone products. It is now in direct competition with camera brands such as Canon and Sony, and has become the world's largest seller of cameras. This is an example of:

A) envelopment.
B) product customization.
C) market diversity.
D) product development.
E) market innovation.

Question 69

A(n) _____ is a product that allows a firm to tap into the complementary products, data, or user base of another product or service.

A) adaptor
B) plug-in
C) emulator
D) add-on
E) transcriber

Question 70

With the help of examples explain how firms have used the strategies of (i) alliances and partnerships, and (ii) leveraging distribution channels, for competing in markets where network effects are present.

Question 71

The ability to take advantage of complementary products developed for a prior generation of technology is known as _____.

Question 72

If a firm's claim in the blue ocean is based on easily _____ resources (like technology features), then holding off rivals will be tougher.

Question 73

Adobe gives away the Acrobat Reader to build a market for the sale of software that creates Acrobat files. This is an example of:

A) one market attempting to conquer a new market by making it a subset, component, or feature of its primary offering.
B) firms giving away products for half of a two-sided market to seed the market.
C) markets, once considered distinctly separate, beginning to offer similar features and capabilities.
D) firms taking advantage of complementary products developed for a prior generation of technology.
E) firms spreading costs across increasing units of production or in serving multiple customers.