So one last, but nevertheless, very important aspect of network effect before we move on to our next topic, which is boundaries of the firm, is the special structure of the market in network industries. So market structures and network industries are often, as we've seen in the early part of this module, they're often very extreme. They're very concentrated and they're very asymmetric. So if we think of a situation with competing standards, what is the likely outcome here? Well, if we do have two competing standards or two competing systems evolving at the same time, what can happen is that one of those two completely takes the market and the other one disappears. So taking the standard battle for video recorders and VCR cassettes between VHS and Betamax. What we see is that VHS actually, they started with a lag. They were second to the market to Betamax, but they got a small lead and eventually they started taking over the entire market. And by 86, there was basically no contest whatsoever, VHS had completely taken the market. So you might wonder how can such similar products, so there are arguments for VHS, there are arguments for Betamax, but there wasn't really that much of a difference between those two. How can such similar products have such different market shares? Well, we're facing what we think of as a tipping market, or what we call a tipping market. So we have a standards battle for VCR cassettes, where VHS had gained a head start against Betamax and we got this outcome. A tipping market is a market with very strong indirect, or direct network effects, so thinking of the VHS example, this had strong indirect network effects because the utility depended a lot on the availability of rental cassettes. And those had to be available on either VHS or Betamax. Studios, as they saw that VHS was starting to gain a lead, they started producing more films for VHS, and rental stores started stocking more cassettes just for VHS. This means that consumers will end up adopting VHS more than Betamax, because there were simply more films available. And on it went. So the market eventually tipped towards VHS, and Betamax eventually disappeared. And this is not something that's completely new, or that's completely unique to VCRs. So looking at browsers, Internet browsers. So you have here the case of Internet Explorer, Firefox, and Chrome, where Internet Explorer had beyond 80% market share in 2002, but they kept on losing steadily to only to be replaced almost by Firefox, which had almost 50% market share around 2009. But then Firefox started losing again, and Chrome started taking over and is now the market leader. What is interesting though, is that you don't have a standards battle in the extreme way that we had with VHS and Betamax. But you had sort of a slow process of replacement and dominance and so on, but none of these systems are taken off the market completely. So what determines market structure in network industries? Well, roughly speaking, we can think of two forces that determine market structure in these network markets. The strength of network effects and the degree of consumer heterogeneity, in taste, for these different products. So we would expect to have a monopoly as a result of a standards battle, if network effects are very strong and consumer heterogeneity is fairly low. In other words, people are pretty much indifferent between one or the other system but they care about network size. So example of this would eBay as an auction platform or VHS as a VCR system. Niche survival is a structure where one firm is dominate but other niche firms are able to survive. This is the case if you have slightly weaker network effects, but in particular you have very strong consumer heterogeneity. In other words, there are some users that will not be swayed by the fact that the other network, the less preferred network, is just huge. So Linux, for example, has been able to maintain a niche presence in the market for operating system, even though Windows was really strong and has been strong and is still going strong for several decades. The third possible market structure would be a case of dominant heterogeneity. So here, weak network effects and high consumer heterogeneity lead to a structure where there's not really one system that ends up dominating. So music players here, for example, would be one case where no one system has managed to replace all the other ones. So this was a brief look at the likely market structures and the possible market structures with network effects, and what the possible determinants are. So while this was the last video on network effects in this module, there will be another module later on in the course that will help you make use of this newly acquired knowledge, and is entirely dedicated to strategies in network markets. But for now, let's move on to the topic of boundaries of the firm, where we'll start with horizontal firm boundaries.
