Identify a true statement about network effects.
A)It makes it easier for new entrants to steal business from incumbent firms.
B)It decreases the switching costs for customers, making it easier for them to choose between different brands.
C)It is the growth in demand for a firm's product that results from a growth in the number of existing customers.
D)It is the cumulative effect produced when one firm enters an industry and makes a profit which triggers other firms to enter the same industry.

Question

Quizplus · Accepted Answer

Network effects refer to the phenomenon where the value of a product increases as more people use it. This leads to a growth in demand for the product as the number of existing customers increases. Option A is incorrect as network effects make it harder for new entrants to steal business from incumbent firms due to the established customer base. Option B is incorrect as network effects increase switching costs for customers as the value of the product lies in being part of a larger network. Option D describes the concept of the "first-mover advantage" and not network effects.

Identify a True Statement About Network Effects