Which of the following is true about network effects?

Question

BlackTom AI · Accepted Answer

First, we restate the question and options to ensure clarity about what is being evaluated. Question: Which of the following is true about network effects?
Answer choices:
- A: The demand faces upward pressure if the user population is larger than the high equilibrium.
- B: The demand faces downward pressure if the user population is smaller than the high equilibrium.
- C: All answers are correct.
- D: The low equilibrium is unstable.

Now, we analyze each option in turn before identifying the overall truth.

Option A: The demand faces upward pressure if the user population is larger than the high equilibrium.
- When network effects are present, a larger user base increases the utility to each user due to more connections, more content, or greater compatibility. If the actual user population exceeds the high equilibrium, the enhanced value of the network can draw in more users or sustain higher willingness to pay, creating upward pressure on demand or price as the network proves its value. This aligns with the notion of positive feedback in networked goods, where bigger networks reinforce higher demand.

Option B: The demand faces downward pressure if the user population is smaller than the high equilibrium.
- Conversely, if the user base is below the high equilibrium, the marginal value of joining the network may appear weaker, reducing individual incentives to join or pay, which translates into downward pressure on demand. This fits the idea that underperforming network size dampens perceived utility and reduces demand relative to a more robust network.

Option D: The low equilibrium is unstable.
- In many network-effect models, there are multiple equilibria (low and high). The low-equilibrium state is often unstable because a small perturbation can trigger rapid growth toward the high-equilibrium due to positive feedback: more users makes the network more valuable, attracting even more users. This instability is a common feature in network-driven adoption dynamics.

Option C: All answers are correct.
- Since A describes upward pressure when above the high equilibrium, B describes downward pressure when below the high equilibrium, and D notes the common instability of the low equilibrium, these statements collectively capture typical properties of network effects models. Therefore, declaring that all provided statements are correct is consistent with the described dynamics.

To summarize the reasoning: each of A, B, and D describes a distinct facet of network effects—how demand responds to deviations from the high equilibrium, and the stability characteristics of the low equilibrium. With these aspects aligning, the composite option C follows as the correct overall summary in this question context.

Which of the following is true about network effects?

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