Gaming system

1. 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?

2. 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?

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 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.

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  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.

6. 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.

7. Solution: Number of people • Note that the number of people does not affect the answer. • N is total number of people. n=(10-v*)(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)

8. 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].

11. 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.

12. 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.

13. 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?