While direct network effects achieve their effects from products that link consumers directly to one another, there are also indirect network effect goods that do this in a, guess what, indirect way. For example, via compatible products. So, what are indirect network effects? How do we define them, and what do they depend on? Well, indirect network effects, also of course, have this property that the utility depends on the number of other users but it's a slightly indirect effect because the utility from the good depends on the number of complementary products. And, therefore, indirectly on the number of other users. So, let's take video games, or video game consoles as an example. So, we've got consumers and we've got games, both of which determine the utility of a video game console. So, the more video games there are for a console, the more attractive it is for consumers, right? Clearly if we've got lots of games to chose from, then it's going to attract more users. On the other hand, the more consumers buy the console or have bought the console, the more attractive it is for companies, for game developers, to develop those games. So, therefore, what we get is an indirect effect from one side of the market to the next. So, the number of users is going to affect the number of complementary goods and the number of complementary goods is going to affect the number of users. So, more complementary goods means more users and more users means more complimentary goods. So, other examples, and we've got that actually as a fairly common phenomenon. Other examples would be credit cards. So, the more consumers have a particular brand of credit card the more shops are going to be attracted to carrying this credit card. And the more shops carry a particular credit card the easier it's going to be for consumers to get that credit card or to get that brand of credit card and subscribe to it, and use it in shops. Software, again if we think of smartphones and apps, the more people have a particular brand of smart phone, the more likely it is that apps are going to be developed for it, and the more apps there are, the more attractive this particular brand of smartphone gets. So, this is about the notion of complementarities. So network goods with indirect network effects, therefore have to be consumed together with other products. These network goods, therefore, are complements and as a consumer, you're not looking at a single product out of those systems but you're looking for the entire system. So, a console could be fantastic but you don't have any games for it, that makes it unattractive. So a worse, technically a worse console with lots of game might be more attractive as a consequence. This also means that compatibility and standards become important strategic variables. So therefore, of course, network goods have to be compatible or they have to operate on the same standard. CDs, for example, have to have the same technical specifications as CD players. Coordination, therefore, between complementary goods producers may be required. So, if you are developing a CD or a CD standard then you going to have to get both CD producers on board and you have to get CD player producers on board, CD player manufacturers. So, you might get this via coordination. So, you speak to the other players that potentially could support your standard or there might even be regulations such as in the case of the GSM Alliance in Europe, which basically set the standard for a second generation mobile telephony. So, these are just some examples of indirect network effects and we'll now move on to the next module, thanks. Well, thank you for staying with me. We're next going to take a look at the market structure in network industries. [BLANK]
