In this module we're going to take a look at competition in network markets, adoption rates, and the advantage of critical mass. So how do we compete in network markets? Well, first of all you need to make sure you achieve critical mass. Of course, expectations matter. So, if I expect lots of other people to adopt the same technology, I'm going to be more inclined to adopt it. Early adopters, therefore, will jumpstart the process. It's going to be much more important to get early adopters hooked on to your network. Intermediate adopters are typically the ones that are fairly difficult to attract. So, once you've attracted them, the technology is going to take off. If you don't manage to take these early adopters, then a bandwagon may not even get off the ground. Positive externalities of network size will not increase forever. So, if we think about the adoption of new technologies, as I said, the adoption of a technology will depend on the observed and on the expected network size. So, this is going to mean that initially just a very few people are going to adopt and this is going to entice only a few others to adopt as well, which makes us basically sit in a low-adoption equilibrium. Few people will adopt because people expect not very many people to go for the new technology. On the other hand, if you get past a threshold value, if you get past this critical mass, then a snowballing effect can occur, because once you've got enough enough consumers then even more consumers are going to find it attractive to go for the new technology. So as an example, let's take the fax machine, which was available since the 1960s. In fact, as a technology, it's been around since the 1800s. But market penetration only began in the mid-1980s. So, looking at this graph here up to the 1980s, penetration, market diffusion, was very very slow and then it all of a sudden started taking off. So, critical mass here was clearly reached in 1985-86 and the market took on and went into a high-adoption equilibrium. So, what is critical mass and why do we care? Why is it important? Well, critical mass is the combination of having a large enough installed base, having sufficiently strong network effects, and having a price that's low enough so that diffusion becomes self-sustaining. And this is important, because self-sustaining means that we don't have to improve the technology, we don't have to lower the price and we don't have to change anything with the technology. More adopters are basically coming into the network, are joining the network because more and more people are joining, right? So, it becomes a self-sustaining, it becomes a self-reinforcing process that leads to the success of the firm. Now, how do these three things, installed base, network effects and price hang together? Well, lower price, a higher installed base and higher network effects make it easier to reach critical mass. In other words, you can get away with a higher price if the installed base is pretty high and if network effects are very strong. Why is it important? Why do we care about this? Well, empirically critical mass occurs in periods of rapid and almost discontinuous diffusion, meaning that all of a sudden the market takes off all of a sudden, diffusion really takes off in a massive way. And managers are going to be interested in that because critical mass means that diffusion becomes self-perpetuating. In other words, my marketing efforts are going to have huge payback, they're going to have huge returns to my investment because there's going to be this element that underlies the whole diffusion process, which is self-sustaining. Critical mass also marks the switch between a low-adoption equilibrium and a high-adoption equilibrium. In other words, once you reach critical mass you switch from a low-adoption equilibrium, where expectations are low and that's why not many people will adopt, to a high-adoption equilibrium, where people expect the technology's success to be successful and that also makes it successful. So, this all sounds great in theory. What is difficult about this? Well, critical mass points can be defined in theory but it's much more difficult to define them in practice. And secondly, how do we identify prospectively? So, can we predict before we launch a technology, where the critical mass point is going to lie? So, of course the useful thing here is to have enough experience, maybe in other countries, maybe with previous technologies, to be able to predict the critical mass point for a new technology. So, as one example if you look at mobile telephony we have looked at the diffusion of digital mobile telephony, second generation mobile telephony, in 36 countries across the globe. And what we find here is that basically in the range between 0.31 and 0.37 cent per minute, so that was the average price per minute, we would have critical mass phenomena. And what we see here from this graph is that installed base can only substitute for the right price, to some extent, but in itself it's not sufficient to boost diffusion. So, let's just have a look at an in-video quiz and then we'll move on to the next module. See you. Okay, now we know that it's beneficial, if not essential, to achieve critical mass. Well, what can you do to gain the full favor of your consumers? Find out in the next video. [BLANK]
