1 / 7

Understanding Aggregate Demand and Network Externalities in Market Competition

This text explores the concept of aggregate demand derived from individual demands between two consumers, identifying how demands combine into an aggregate curve. It addresses the impact of network externalities in markets, where the value of a good increases with the number of users. By analyzing competition examples (e.g., Sony vs. Beta), the text highlights equilibrium conditions under various market scenarios. It also reviews specific demand functions to illustrate the effects of consumer behavior on aggregate demand and market dynamics.

anika-browning
Télécharger la présentation

Understanding Aggregate Demand and Network Externalities in Market Competition

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 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?

  2. 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?

  3. 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.

  4. 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?

  5. 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.

  6. Discussion points • Competitors: Sony vs. Beta, Qwerty vs. Dvorak, Windows vs. Mac, Playstation vs. Xbox. • Does the best always win?

  7. 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}.

More Related