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Network externatities and company size

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Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. (At the same time, some internet businesses such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why?) Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete? As noted in Chapter 3, network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software, participating in electronic markets, or using instant messaging increase with the number of other users.) How might externalities affect firm operating strategies (pricing, output, and advertising) and firm size?

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Transaction costs and e-commerce; small suppliers and information goods and services

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When we see a small number of firms, it is usually due to high start up costs. Those firms already entrenched in the market can then effectively price out smaller competitors. Information goods and services are precisely like this. A lot of programming time goes into making an operating system, for example. Musicians may spend many hours recording an album. But once the first complete OS or album is finished, it is a simple matter to replicate it many times. Thus variable costs are low, but fixed costs are high in this industry.

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