Final answer:
A firm that successfully leverages network effects can establish a permanent competitive advantage.
The answer is option ⇒b
Step-by-step explanation:
When a firm has network effects working in its favor, several advantages can arise:
1. Increased user base: As more users join the network, the value of the product or service grows, attracting even more users. This creates a virtuous cycle where the network becomes more valuable and appealing to new users.
2. Higher switching costs: Network effects can lead to high switching costs for users. If a network has a large user base, individuals are more likely to stick with it because they would lose the benefits and connections they have established by switching to a different network. This creates a barrier for competitors trying to attract existing users away from the established network.
3. Economies of scale: With a large user base, a firm can achieve economies of scale, allowing it to spread its fixed costs over more customers. This can lead to cost advantages that are difficult for new entrants to match, further solidifying the firm's competitive position.
4. Strong network effects can create significant barriers to entry, making it challenging for new competitors to enter the market and attract a critical mass of users. This gives the firm with the established network a sustainable competitive advantage.
The answer is option ⇒b