MIS Chapter 3 Study Guide

Information Technology Management | Platforms & Network Effects

Relevant Lexicon

Network Effects (Metcalfe’s Law) The value of a network increases with the number of users. Value is proportional to the square of the number of users ($n^2$). Slides 5-6
Marginal Cost The cost to produce one additional unit. In software, once the first copy is made, the cost to produce more is effectively zero. Slide 10
Two-Sided Market Markets comprised of two distinct categories of participants (e.g., video game players and developers) that both need to be present for the network to function. Slide 14
Cross-Side Exchange Benefit When an increase in users on one side of the market creates a benefit for the other side (e.g., more users attracts more developers). Slide 14
Platforms Products and services that allow for the development and integration of software products and other complementary goods (e.g., Roblox, Windows). Slide 17
Convergence When two or more markets, once considered distinctly separate (like cameras and phones), begin to offer the same features and capabilities. Slide 22
Envelopment A strategy where a firm in one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering. Slide 22
Backward Compatibility The ability of a new technology to take advantage of complementary products developed for an older version (e.g., playing old games on a new console). Slide 23

Interactive Practice

A startup develops a new GenAI writing assistant. After the initial $2 million investment to build the core model, the CEO notes that adding the 10,001st customer costs the company nearly nothing compared to the first customer.

Which economic concept best explains the CEO's observation?

A new ride-sharing app launches in Austin. To be successful, the company must simultaneously convince enough drivers to join the app so that riders find it useful, and enough riders to join so that drivers earn a living.

This business is operating in what type of market?

In the early 2010s, consumers used to carry separate devices: a Nikon digital camera, a Garmin GPS, and a Motorola phone. Today, most students just use an iPhone which performs all these functions.

Which concept describes this market shift?

Microsoft included its Internet Explorer web browser and Media Player for "free" within the Windows operating system. By doing this, they effectively destroyed the market for standalone browser companies like Netscape.

Which strategy did Microsoft use to conquer the browser market?

When Sony released the PlayStation 5, they ensured that almost all PlayStation 4 games would still work on the new hardware. This made it much easier for current fans to justify buying the new console immediately.

Sony is leveraging which strategy to maintain its network?