Why is oligopoly likely to be present in industries that see significant positive network effects?
What will be an ideal response?
A positive network externality occurs when a consumer’s quantity demanded for a
good or service increases because a greater number of consumers purchase the same
good or service. The bandwagon effect is one such example. Consumers tend to
choose the products that everyone else is using. Oligopolists can capitalize on this
phenomenon through their marketing and advertising campaigns. With only a few large
firms dominating an oligopoly market, consumers are likely to develop strong brand
loyalty. This makes it difficult for them to be lured away by any newcomers able to
surmount the extensive barriers to entry to the industry. In addition, consumers that
have joined a larger network through positive network externalities may be reluctant to
leave due to switching costs. Positive network externalities and switching costs benefit
the earliest firms in a market, in this case oligopolistic firms, and help them dominate the
market.
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