Question

When network externalities are present

Answer 1

The network externalities mean that one individual's utility of commodity depends upon the number of other people used in that commodity. The network externalities generally arose through a fashion or style. For example, the dress choice of girls depends upon other girls are wearing that dress. It increases the demand for that particular dress. The network externalities are here is that, if someone adopted a style and it goes to some people adopting, and then it becomes out of fashion. Another externality is complementary goods. Means the intrinsic value of goods is higher than its complementary goods. The theory of network externality is based on two theories such as Bandwagon effect and snob effect.