Question

Clear Calls Inc., a telephone service provider, has a large user base mainly because phone calls and messages between all Clear Calls users are free. When a person switches to a Clear Calls network, his or her entire network of family and friends is likely to switch to the same network to avail the benefit of free calls and messages. In addition, an existing user who gets a new user to register with Clear Calls Inc. is given a free wireless connection. This has helped to keep competition away from Clear Calls. In this scenario, which of the following factors is acting as an entry barrier for Clear Calls Inc.?

A. economies of scale
B. high capital requirement
C. network effects
D. high fixed costs
C. network effects

Answer 1

Answer: The correct answer is "C. network effects".

Explanation: It is said that a network effect occurs when the value of a good or service depends on the number of people who use it. In general, when there is a network effect, the higher the number of users, the greater the value or utility will have that good or service. Therefore the network effects are acting as an entry barrier.