Transcript micro2002i
Information Technology
• 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 nv,
where n is the number of persons who buy
the good.
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 c; i.e.
only large v v* = c/n*.
• The other point is unstable and called a threshold
point. Below this, demand will go to zero. Above
this, the product would be a hit.
Discussion points
• Competitors: Sony vs. Beta, Qwerty vs. Dvorak,
Windows vs. Mac, Playstation vs. Xbox.
• 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.
Aggregate Demand
• How do we get aggregate demand from
individual demands?
• Two people with demands xA(p1,p2,m) and
xB(p1,p2,m).
• Aggregate demand X=xA+xB.
• What does this look like with demand
curves? Horizontal or Vertical addition?
Demand Review
• What is aggregate demand if
– XA=10-p.
– XB=20-p.
• What about if they only consume positive
amounts of a good?
– XA=Max{10-p,0}.
– XB=Max{20-p,0}.
Which card should you use first?
• Seller has cards 3 and 5. The price is 6. Which
should the seller use first?
• Should the seller save the best for last in order to
increase sales?
– Say the future price is pf=6. Profits are 4 no matter
which card is used first.
– Say pf=4 and the seller uses 5 first. The seller can then
use the 3 card and make profits 6-5+4-3=2.
– Say pf=4 and the seller uses 3 first. The seller cannot
sell the new unit and will make profits of 6-3=3.
• Selling less may be better! Always use the lowest
card first. (Or highest card first for buyers).
Does tax incidence matter?
• Public thinks so, economics thinks not.
– US taxes cigarettes while subsidizing tobacco farmers.
– In Canada replacing a manufacturer’s tax with a
consumer tax cause a PM to resign.
• Equilibrium is for sellers’ tax S(p1-t)=D(p1) or for
buyers’ tax S(p2)=D(p2+t).
• If p2=p1-t, it is the same.
• Cost is the same. Net of taxes: Sellers get p1-t.
Buyers pay p1. Government gets t*D(p1).