Question

To have a​ monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to​ entry? Explain.

Answer 1

Network externality is one of the market failures that justify the regulation of telecommunications markets and especially the interconnection between operators' networks. Externality is defined as the variation in utility that an agent obtains when the number of other agents that consume the same type of good or service varies. External effects are considered network effects that cannot be internalized by market agents.

Network externalities lead to the creation of natural monopolies as they generate positive feedback processes that make each new user of a service more valuable for the next user.