Chapter 16, Problem 9P

To determine

The reason behind network externality as an important feature of high tech industries.

Concept Introduction:

Externality in Economics:

In economics, externality is a concept which discusses the consequence of an economic activity which can have a positive or a negative impact on the third party who is completely unrelated to the activity.

Positive externality:

Externality which creates benefit to the third party is positive externality.

Negative externality:

Externality which creates harm to the third party is negative externality.

Network externality:

Network externality is a special type of externality where one person’s marginal benefit of the good or service depends on the number of other consumers of the product. Network externality can be defined as the change in benefit that the individual derives from consuming a good or service when there is a change in the number of other individuals consuming the same product or service.