Explain why the cost structure associated with many kinds of information goods a
ID: 1246864 • Letter: E
Question
Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. (At the same time, one internet business such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why.) Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete? As noted in Chapter 3, network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software, participating in electronic markets, or using instant messaging increase with the number of other users.) How might network externalities affect firm operating strategies (pricing, output, and advertising) and firm size?Explanation / Answer
Supply of Information goods, such as softwares, genrally requires a lot of fixed investment in the beginning and then the average cost delines till the output reaches a considerable percentage of the whole market demand. In other words, the market structure in the case of information goods is such that it can accomodate only a few firms producing at the output level at which their AC is lowest.
Online grocery stores suffered losses as the industry is at a nascent stage and the stores are vying for market share.
Small suppliers that do not have enough resouces to invest in brick-and-mortar shops find it easier now to reach the customers through online stores.
Facebook can be considered an information good, as it provides information on what friends and different organisations are upto. Facebook has great network externalities. It is almost impossible now for some other online social website to become as big as Facebook. In case of network externalities, first mover advantage is excessive. Apart from that, if a firm is already well established, then other aspirant firms have to invest heavily in advertising in the beginning so as to reach as many users (or customers) as possible.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.