Transcript Aggregate Demand - University of Haifa

Gaming system
• Which video game system do you have?
– Why did you buy that brand?
• Which car do you have?
– Why did you buy that brand?
• Washing Machine?
– Why did you buy that brand?
Network Externalities
• Phones, Faxes, e-mail, etc. all have the following
property:
– Network externalities: The more people using it the
more benefit it is to each user.
• Computers, VCRs, PS2s, also have this property
in that both software can be traded among users
and the larger the user market, the larger number
of software titles are made.
• How do markets operate with such externalities?
Competition & Network
Externalities
• Individuals 1,…,1000 (call this number v)
• Each can buy one unit of a good providing a
network externality.
• Person v values a unit of the good at n v,
where n is the number of persons who buy
the good.
• Note in the experiment we had v be the max
value and true value proportionate
(n/1000)*v.
Competition & Network
Externalities
• What is the demand at price p?
• If v* is the marginal buyer, valuing the good
at nv* = p, then all buyers v’ > v* value the
good more, and so buy it.
• Quantity demanded is n = 1000 – v*.
• So inverse demand is p = n(1000-n).
• Graph this!
• What is the supply curve if marginal cost
c<250,000?
Competition & Network
Externalities
• What are the market equilibria?
• Zero.
• A large numbers of buyers buy.
– large n*  large network externality value n*v
– good is bought only by buyers with n*v  p; i.e.
only large v  v* = p/n*.
• The other point is unstable and called a threshold
point or tipping point. Below this, demand will
go to zero. Above this, the product would be a hit.
Solution
• If p=160,000, what are the
– Failure equilibrium.
– Threshold point.
– Success equilibrium.
• In the experiment (treatment 1), we had v be
uniform on [0,10] and p=2.4. Actual value
was v times fraction, e.g., for 10 people
v*(n/10). In this case, what are the
– Failure equilibrium.
– Threshold point.
– Success equilibrium.
Solution: Number of people
• Note that the number of people does not
affect the answer.
• N is total number of people. n=(10v*)(N/10). Or v*=10-10n/N.
• Thus, p= (10-10n/N )(n/N).
• Call z=(10n/N). Substituting yields
• P=(10-z)(z/10)
Solution treatment 2?
• What is the solution for treatment 2?
• We still had a price of 2.4, but values were
drawn from [0,7].
Facebook
• In Feb 2004, Facebook was launched by
Mark Zuckerberg.
• For 2+ Month prior, he had orally agreed to
work for the Winklevoss twins developing
the Harvard Connection (which had been in
development for 2 years).
• In April 2004, the Harvard Connection was
launched and a failure.
• In Sept. 2008, they settled for 65 million
dollars.
Discussion points
• Competitors: VHS vs. Beta, Qwerty vs. Dvorak,
Windows vs. Mac, Playstation vs. Xbox, Blue-ray
vs. HD-dvd.
• Does the best always win?
• Standardization helps with network externalities.
– Drive on left side vs. right side. Out of 206 countries
144 (70%) are rhs.
– Left is more nature for an army: swords in right hand,
mounting horses. (Napolean liked the other way.)
– Sweden switched from left to right in 1967.
• Lots of networks: Religions and Languages.
Homework.
• Students like to go to the Haifa Ball depending upon how many other
students go there.
• Tickets cost 32 NIS each.
• There are 1000 students indexed by i from 1 to 1000.
• Student i has value vi=i.
• Student i has utility (in shekels) for going to the Ball of vi⋅(n/(5000)),
where n is the total number of students going to the Ball.
• (i) If everyone believes n=500, which students will be willing to go to
the ball?
• (ii) What is the threshold number of tickets sold above which it will be
a success and below which it will be a failure?
• (iii) What is the equilibrium of tickets sold if the ball is a success?
• (iv) What is the equilibrium of tickets sold if the ball is a failure?