Overview of Network Industries

This book is about markets. Not really a special type of market, since there are many markets for goods and services that satisfy the characteristics of what we call network products. These markets include the telephone, email, Internet, computer hardware, computer software, music players, music titles, video players, video movies, banking services, airline services, legal services, and many more. This book is also about social interaction and how it affects consumers’ choices of products and services they buy.

The main characteristics of these markets which distinguish them from the market for grain, dairy products, apples, and treasury bonds are:

• Complementarity, compatibility and standards.

• Consumption externalities.

• Switching costs and lock-in.

• Significant economies of scale in production.

Complementarity, compatibility and standards

Computers are not useful without having monitors attached, or without having software installed. CD players are not useful without CD titles, just as cameras are not useful without films. Stereo receivers are useless without speakers or headphones, and airline companies will not be able to sell tickets without joining a particular reservation system. All these examples demonstrate that, unlike bread which can be consumed without wine or other types of food, the markets we analyze in this book supply goods that must be consumed together with other products (software and hardware). In the literature of economics, such goods and services are called complements. Complementarity means that consumers in these markets are shopping for systems (e.g., computers and software, cameras and film, music players and cassettes) rather than individual products. The fact that consumers are buying systems composed of hardware and software or complementary components allows firms to devise all sorts of strategies regarding competition with other firms.