The presence of network effects can predispose an industry toward which of the following?

• A. Decreasing marginal social benefit as more users join
• B. Constant returns to scale for all firms
• C. Monopoly or market dominance by a single firm
• D. Perfect competition with many small firms

Answer: (C)

Verified step by step guidance

1. Understand the concept of network effects: Network effects occur when the value of a product or service increases as more people use it. This means that each additional user adds more benefit to existing users.
2. Analyze how network effects influence market structure: Because the value of the product grows with more users, consumers tend to prefer the product that already has a large user base, creating a positive feedback loop.
3. Consider the implications for competition: This positive feedback can lead to a situation where one firm gains a disproportionately large market share, making it difficult for smaller firms to compete.
4. Relate this to market outcomes: The tendency for one firm to dominate due to network effects often results in a monopoly or market dominance by a single firm, rather than many small firms competing.
5. Conclude why other options are less likely: Decreasing marginal social benefit is contrary to network effects, constant returns to scale is unrelated to network effects, and perfect competition is unlikely because network effects create barriers to entry and favor large incumbents.