Network Effects Silence Phones!

In teaching industry analysis, I always make a point of discussing network effects as a potential barrier to entry (see Peter Klein’s comment to this post on the term “network externalities”). Usually, I use an example like the iPhone FaceTime application which increases in value depending on the number of family and friends who have iPhones. This, in turn makes it hard for rivals to enter because of the need for a large installed base. Google+ is another example in it’s failure to make much of a dent in Facebook’s market. Now, a new app gives discount points to students for locking their phones based on the number of other locked phones in the same vicinity. As such, when the whole class locks down using the PocketPoints app, they all get discount points. This pushes everyone to adopt the same app to get the most points and makes it hard for a competitor to enter. This might also be a nice way to turn the class into a lab to study game theory, or incentives. It does all this and keeps people off their phones in class! The following video describes the app.

Heard Through Virginia Postrel

4 thoughts on “Network Effects Silence Phones!

  1. Nice post. Just a small quibble: I try to avoid the term “network externalities” in favor of the more general (and neutral) term “network effects.” Not all network effects generate externalities; for example, an organization may put its employees on the same instant message system to exploit demand-side economies of scope, but the benefits are wholly internalized by the organization.

    I know I sound pedantic (no surprise) but there’s a serious point here, namely that people often automatically think network effects represent a type of market failure that warrants some government response. The many papers by Liebowitz and Margolis are good on this point.

  2. Good point. I changed it to “effects.” Besides, it makes a lot of sense to say that “network effects silence phones”

  3. Still confusing:
    How are the discounts points “based on the number of other locked phones in the same vicinity”?

    And if they aren’t, the only network effect is an indirect one, in that more and more restaurants and outlets offer the redemption. Or did I miss something here?

  4. Yes, discount points are given when the phone is on campus and people in close proximity are using the app (e.g., class or library).

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