The network effects theory holds that products are more valuable to consumers the more widely they are used (Stenborg). This is certainly true of Microsoft Windows, an operating system that received the widest range of hardware and software compatibility as its popularity soared. Further, as businesses invested time and money to train their employees in Microsoft products, they continued to upgrade to the same software to maximize productivity.
Firms in new economy industries must invest great sums of money to develop their products, either in upfront research and development or in physical or virtual networks to create and deliver products (Stenborg). Microsoft is a natural monopoly business (Spaudling). Initially, it is expensive to produce software, but it is very cheap to make copies. The marginal cost of Microsoft's software is virtually zero, so average total costs decline with each copy sold. As the company established its lead, it become more difficult for competitors to compete against it with lower prices, sine their own costs have to be recouped with fewer sales.
In the new economy, innovation produces a winner takes all or almost all of the market (Stenborg). This happens because of the network effect discussed above which makes it easier to attract additional customers with more attractive products. and, making more sales allows firms to reduce their average costs and to make high profits while charging low prices. In fact, in the new economy network effects and scale economies are so strong that some companies will give away their products to gain market penetration and influence standards (Stenborg). This is in sharp contract to the traditional function of a monopoly that tries...
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