Final answer:
Network effects refer to the increasing value of a product or service as more people use it and can indirectly act as barriers to entry, although they are not barriers themselves. None of the provided options accurately describe network effects.
Step-by-step explanation:
Network effects refer to the phenomenon where the value of a product or service increases as more people use it. This is not the same as barriers to entry, which are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. To answer the student's question, network effects are not barriers to entry, but can in fact act as one, especially when an existing product or service has a large user base that makes it difficult for new entrants to compete. Hence, among the options given:
- A. They are barriers to entry. Incorrect
- B. They are taxes, but do not exist in U.S. markets. Incorrect
- C. They are incentives for new firms to enter an industry. Incorrect
- D. They are subsidies that increase competition in the market. Incorrect
In the context of the student's multiple-choice question, none of the answers provided accurately describe network effects. However, the correct understanding is that network effects can strengthen barriers to entry indirectly.