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. Network externalities ______.

(A) create barriers to entry because a firm efficiently offers products that satisfy consumer preferences.
(B) remove barriers to entry because such externalities require multiple firms to provide the goods and services in the network.
(C) create barriers to entry because consumption of a​ firm's product decreases the value of goods and services produced by other firms.
(D) create barriers to entry because if a firm can attract enough customers​ initially, it can attract additional customers as its​ product's value increases by more people using​ it, which attracts even more customers.
(E) create barriers to entry because economies of scale are so large that one firm can supply the entire market at lower average total cost than can two or more firms.

Answer 1

Answer: Option D

Explanation: Network externalities are indeed an economic principle that defines the conditions in which a product or service's value increases or decreases as the number of customers increases or declines.

As the availability of an item raises the price of the product falls it becomes less valuable, according to the traditional economic theory. This is termed "positive externalities of the network" or "network influence."

Thus, somehow it creates barriers for other firms by prepairng a strong customer base for an experienced firm.