Reference no: EM133080066

Problem 1. (a) What kind of network effects is present in this market (direct and/or indirect)? Consider the market for smartphones. People buy smartphones because they want to use apps. Assume that app developers are willing to write more apps if there are more users on a platform such as Windows Phone, Android or iOS.

(b) Assume that the market price for any smartphone is p. Recall the graph of demand and supply in a model with network effects (with network size on the horizontal axis and price on the vertical axis). Indicate the critical mass network size. Explain what happens if the market share falls below the critical mass or above the critical mass. Where will the market end up if either of these events happen?

(c) The US smartphone market share of iOS has been above 40% for in 2018, Android has been above 50% and Windows Phone has declined from about 3% to less than 2% over the course of the year. Even Bill Gates switched to an Android phone. Indicate the position of each of the 3 platforms on the horizontal axis in your graph relative to the critical mass (redraw the graph below to ensure readability).

(d) Do you think the critical mass for a smartphone platform is below or above 3%? Justify your answer.

(e) In 2012 Windows Phone started a program that paid developers a reward for each app they created. What was the motivation for this strategy?

(f) The program increased the number of apps in the Windows Phone app store but it also lowered average quality of apps. How could the Windows Phone team have modified the program to avoid this unintended consequence?