Which of the following statements correctly identifies a similarity between network effects and economies of scale?
A) Both are related to the costs incurred by a firm.
B) Both act as barriers to entry in a market.
C) Both act as disincentives to monopolies.
D) Both are related to the number of consumers using a firm's product.

Question

Quizplus · Accepted Answer

Both network effects and economies of scale act as barriers to entry in a market. With economies of scale, as a firm increases its production, it is able to spread its fixed costs over a larger output, lowering the average cost of production. This makes it difficult for new firms to enter and compete as they would not be able to achieve the same level of efficiency until they reach a similar scale. Similarly, with network effects, the value of using a product or service increases as more people use it. This makes it difficult for new firms to enter the market as they would have to convince a critical mass of consumers to switch to their product or service in order to reach the same level of value for consumers.

Which of the Following Statements Correctly Identifies a Similarity Between