Economic Theory of Networks
answer this question:
You have developed a new product which performs the same service as an established product and your product is much better than the established product. Specifically, if the number of users of the two products were the same, then each potential purchaser’s reservation price for your product would be twice their reservation price for the ex- isting product. The difficulty that you face is that these are products with network effects and no one wants to use more than one of the two products. Currently, every potential purchaser is using the established product. Your cost of production and your competitor’s costs of production are exactly the same and let’s suppose that they are equal to the price at which your competitor’s product is sold.
If all of the potential purchasers switched to your product the maximum price that you could charge (and still have all of them buy your product) would be twice the current price. So clearly you could make a nice profit if you could attract these potential purchasers. How would you attempt to convince users to switch to your product? You do not need to construct a formal model of the situation described in this question. It is sufficient to describe the strategies that you would try.
