Network externalities are concerned with products whose usefulness appreciates owing to the number of people using the commodities. The introduction of a similar commodity or better service compared to the one that most consumers are used to may be faced with some challenges whereby it may be difficult for the users to shift to the next available and more efficient means mostly due to the cost involved. In the end the externalities may end up to the realization of inferior products are will clearly be illustrated in the section below.
According to a majority of economists, network externalities are likely to have a significant downside owing to the fact that they may push the consumers to purchase commodities which bear inferior technologies. This may be due to the switching costs resulting from the externalities that occur as a result of changing products. In such a case, it can be observed that the establishment of a commodity may make it difficult for the consumers to switch to a better product with a more advanced technology ( Hubbard & O'Brien, 2015 ). This happens owing to the perceived additional cost expected to be incurred in the process. A good example of an inferior technology resulting from network externalities is the QWERTY format of the keyboard observable in a majority of computers ( Hubbard & O'Brien, 2015 ). Initially, before the existence of computers, it was observed that typewriters were working at a very fast pace, resulting to the sticking of some of the keys. This led to the introduction of the QWERTY format that was meant to reduce the speed of the type writers. Following the invention of computers, the QWERTY layout remained since most of the people were already used to it, and any changes may result in unwarranted costs on their part ( Hubbard & O'Brien, 2015 ).
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It is true that network externalities are a causative agent of inferior products. Take for instance, the windows operating system. People have become well accustomed to its functionality to an extent that they would not readily adopt another system. Some economists such as Stephen Margolis and Stan Leibowitz are in agreement with the fact that the superior technologies result in greater profits compared to the loss likely to be incurred as a result of switching costs ( Hubbard & O'Brien, 2015 ). A key thing to note is that not every economist is in support of the idea that network externalities act as hindrances. Similarly, a real life scenario on the same occurs in a situation whereby people leave tips at restaurants most of the time for fear that they might not get fair treatment during their next visit.
When Microsoft introduced MS- DOS in the 1980`s, it quickly gained a lot of popularity compared to other software manufacturers by managing to get an 85% share of the market ( Hubbard & O'Brien, 2015 ). Since then, introduction of other operating systems has not been successful in gaining recognition since consumers have chosen to stick to what they know. This means that even if a more superior product or service is produced, it goes through a challenging time before gaining acceptance and in such a case the entity that has established a monopoly may still establish inferior products and have them approved by consumers. The popularity of a commodity acts as a great determiner on whether individuals will consume the specific product. People appear to get more utility from such consumption. In this case, it is evident that culture, religion and other influences are some of the determinants on whether individuals will consume a particular product.
It is apparent that network externalities can indeed result in products that are inferior. From the analysis above, one can observe that most consumers tend to stick to a service or product that they are used to. Costs involved during transition from one system to the next, happen to be some of the greatest contributing factors. The QWERTY system had been in use before the invention of computers and upon introduction of the latter, it was observed that it still continued since people were already used to it. The same applies for services which people access on a daily basis. It can hence be concluded that network externalities act as barriers to the creation of novel and high quality products; though not every economist is in agreement with this.
Reference
Hubbard, R. G., & O'Brien, A. P. (2015). Essentials of economics .
