Strength of the Network Externality

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A Monopolist Facing Network Externalities

A substantial network externality effect will assist a monopolist in maintaining her status quo, especially if she makes sure no one else joins her network. Why is this so? When network externality effects are strong, the monopolist can sell her good at a high price, since the consumers derive a lot of utility from the size of the monopolist's output. As a result, any small start-up won't find it profitable to produce any output at all, unless she can become compatible with the entrenched monopolist.

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