Which statement describes an example of a vicious cycle due to network effects in the market for a network good?
A) Marginal costs rise, making it increasingly difficult for a firm to cover its costs.
B) A firm that has been growing rapidly due to network effects starts to lose customers to a new substitute good, reducing the number of customers more rapidly.
C) A recession causes a jump in unemployment in the market area. As unemployed people cut back on spending, the drop in sales causes firms to lay off more workers, increasing unemployment and causing firms to fail.
D) The firm must raise prices to sell more due to network effects, but the increase in price discourages purchases, causing the firm to constantly function in conflict with itself.

Question

Quizplus · Accepted Answer

Network effects mean the value of a product increases as more people use it. In choice B, a firm initially grows because its product becomes more valuable as more people use it. However, when a substitute good appears and starts drawing customers away, the network becomes less valuable, accelerating customer loss in a vicious cycle.

Which Statement Describes an Example of a Vicious Cycle Due