Exploring Path Dependence

20. It is not just products that can have network economies. When an airliner flies from Berlin Germany to Rome Italy, the pilot talks to the control towers in English. English has become the language of international business. How does the concept of network externalities help explain why?

21. The success of eBay led to the establishment of many auction sites on the web, Most of them copied the structure and policies of eBay, yet none of the imitators was nearly as successful as eBay and most have disappeared. Yahoo, for example, is one of the biggest of the Web companies, and it initially tried to compete in auctions by not charging commissions. Yet its auction site was always small compared to eBay's, and in 2007 Yahoo decided to abandon the auction business.

If you were a seller, would it not have been better to list at Yahoo, which did not charge anything for listing or selling, than to list at eBay, which charged a $.25 listing fee and a commission of up to 5% on sales? The services that Yahoo offered both buyers and sellers were almost identical to those on eBay, yet the Yahoo auctions were empty compared to those on eBay.

See if you can find any auction site that is provides the same services as eBay, which allows anyone to sell and anyone to buy. If you can find one, look at the number of auctions in each and the number of bids that items get. Come up with a hypothesis about why eBay so dominates this business. (Hint: The last section argued that in some industries, bigness begets bigness. Once you get big, you stay big. Why would this happen in an auction site?)

22. Which of the following products seem to have network externalities?

Microsoft Word
Google Search
Yahoo mail
the iPod

Can you think of some products that do have network externalities? Some that may seem to have but do not?

23, Network externalities are related to a number of other topics in economics. Can you explain how they are related to positive or amplifying feedback, barriers to entry, natural monopoly, and positive or negative externalities? Several terms that are not discussed in the text but which are related to network externalities are "path dependence," "lock-in effect," and "first-mover advantage." Search for them on the internet and explain how they are related to network externalities.

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