Which of the following is false about the economy under a network effect?

Question

BlackTom AI · Accepted Answer

To evaluate the statements, I’ll consider what the network effect implies for an economy:
Option 1: 'The market has a zero equilibrium.' This is incorrect because network effects typically create multiple, nonzero equilibria rather than none; a zero equilibrium would suggest no potential adoption or participation, which contradicts the essence of path-dependent uptake in network economies.
Option 2: 'The market has a smaller, unstable equilibrium.' This is consistent with the standard two-equilibrium picture: a small, unstable tipping point where adoption is precarious, and a path toward either low or high adoption depending on traction and external factors. The unstable equilibrium sits between the two basins of attraction.
Option 3: 'The market has two equilibria.' This aligns with the conventional understanding of network effects producing bistability: a low-adoption equilibrium and a high-adoption equilibrium, with the transition governed by tipping points and reinforcing feedback.
Option 4: 'The market has a larger, stable equilibrium.' This matches the typical high-adoption state in networks, where positive feedback leads to a large, stable equilibrium once adoption crosses the unstable threshold.
In summary, the false statement is the first one because it asserts a zero equilibrium, which contradicts the commonly observed multi-equilibrium structure in networked economies. The remaining options describe the standard two-equilibrium scenario with a small unstable point and a large stable point, which are correct characterizations of network-effect dynamics.

Which of the following is false about the economy under a network effect?

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