Clear Calls Inc., a telephone service provider, has a large user base mainly because phone calls and messages between all Clear Calls users are free. When a person switches to a Clear Calls network, his or her entire network of family and friends is likely to switch to the same network to receive the benefit of free calls and messages. In addition, an existing user who gets a new user to register with Clear Calls Inc. is given a free wireless connection. This has helped to keep competition away from Clear Calls. In this scenario, which of the following factors is acting as an entry barrier for Clear Calls Inc.?
A) economies of scale
B) high capital requirement
C) network effects
D) high fixed costs

Question

Quizplus · Accepted Answer

In this scenario, network effects are acting as an entry barrier for Clear Calls Inc. Network effects describe the positive effect (externality) that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users.