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Arthur Levitt Public Affairs Center

Levitt Center
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Student-Led Activities

Think Tank: The Economics of Networks: What types of goods exhibit network externalities?

By Amy Song '16

Professor Jensen addressed the emergence of “network economics” and its implication on the market and firm decision-making. Facebook, Face Time, fax machines, PS3 and Apple products are all examples of direct and indirect network externalities. Network industries tend to tip toward monopoly; no one is switching to Google+ when everyone else is using Facebook, and you are not going to buy Nintendo games when you have a PS3 station. Firms thus recognize the importance of early acquisition of customers, leading to dynamic competition in the R&D department. Once a network is established, firms ask what they can do to tip it over to another network.