Strategy for Information Markets/Network Externalities/Expectations Management

Expectations management is an important aspect of network effects. Success or failure in network implementation can affect whether or not the network will achieve a low or high network size equilibrium. Positive feedback has a pushing affect near the critical mass which will determine whether a network will be successful. When expectations of the quantity of people in a network exceed critical mass, the positive feedback effect will make the network stronger. On the other hand, the network will fail when expectations fall short of the critical mass.

Expectations management and competition

First, expectations management can really take two sides. There is the up-side, which is that one's own network would utilize expectations management. The down-side consists of the employment of fear, uncertainty, and doubt FUD from rival networks to hinder a competing network from succeeding.

There are some ways to exceed critical mass, it can be:

1. Alliances.
2. Advertising.

These can help the quantity of people’s expectations exceeds critical mass, and it have a positive feedbacks to network, it lead network to be successful.

Using advertising/vaporware to exceed critical mass

On a positive side, companies employ expectations management in an effort to help their network succeed. Such tactics include vaporware, heavy advertising, offering subsidies or lower prices to new members (this is used quite often in traditional markets as well). For example, suppose a network recently entered a market with high network externalities as shown in Figure 1a. Initially, expectation of the network will be at Q1 which fails to exceed critical mass. For simplicity, the outer points for both diagrams below have been labeled F (fail) and S (success) instead of the low demand and high demand points. The effects of positive feedback will push the market and/or expectations to point F; therefore, the network will not succeed because the expected size of the network is not appealing enough for others to join. Strategies such as advertising and vaporware cause the expected size of the network to exceed critical mass. These strategies will cause expected quantity (Q1) to leap over critical mass at Q2 as shown in Figure 2a. Now that Q2 exceeds critical mass, positive feedback will make the network more successful as Q2 will reach and stay at point S.

Expectations management and FUD

In a more malicious tone, expectations can be bitter. Fear, uncertainty and doubt (from here on referred to as FUD) are intentional attempts to discredit a rival company/network. FUD is essentially rhetoric by opposing sides through the placement of disinformation in an attempt to discredit their rival network/firm. Although the statements placed may be entirely false, the typical real world setting of asymmetric information can make this tactic easy to employ. Since consumers do not usually have the extent of information that the rival firms do, a more recognizable (by brand) firm can employ FUD tactics to dispose a new company even though their network/product may be entirely superior and less costly to a consumer.

Possible tactics of FUD may include the intentional disclosure of overstated sales numbers. For example, Sony may run a commercial advertising a huge sales number for Sony or very small numbers for competing firms (both relative to each other). This tactic would show potential buyers/users that the expected size Sony's network is larger than competing networks; therefore, members of competing networks would have doubt and proceed in switching to Sony. In this case, creating doubt in competitive networks would be considered a successful FUD tactics.

Other options of FUD attacks could include comments regarding the durability of a product or a network's hardware reliability. Using FUD tactics has the opposite effects of advertising and vaporware on the competing network. The misinformation makes it perceivable that the competing network is expected to lose enough members that the current members will leave because a small network does not provide enough benefit to them. The expected quantity of people in the network will leap backwards toward point F. Therefore, positive feedback will prevent the competitor's network size from exceeding critical mass and no one will want to be part of the network. FUD tactics have mostly occurred in the computer and software industries. For instance, Digital Research developed their DR DOS while Microsoft provided MS-DOS5 in their computers. Microsoft soon came out with MS-Windows 3.1 which was not compatible with the DR DOS. Then Microsoft advertised the upcoming release of MS-DOS6 which was expected to be much better than DR DOS. However, Microsoft had looked into MS-DOS6 but did not reach the developing stage. Although this may seem like a vaporware strategy, the negative side of announcing the future release of MS-DOS6 created uncertainty/doubt for Digital Research and its consumers. As a result, Digital Research experienced low demand for their technology. In general, FUD tactics that produce fear occur in political campaigns. An extreme example of FUD in political campaigns is the daisy commercial that was broadcasted on television.

Finally, with the presence of FUD existent in a market, reaching that critical mass point(see next section) can become an even more challenging task for a network. Employment of FUD may also take out a network that has already passed critical mass. The latter, however, would require more ingenuity on the rivaling firms end however to create enough disinformation regarding the succeeding network.

other section

There are two main ways for a business to achieve critical mass for the product.

Critical mass: In a market with network externalities, there may be a critical mass exist. The product will succeed if and only if it can achieve a greater use than the critical mass.

Externality: If some people do something which harms or benefits someone who isn’t involved in the decision, the effect on the person involuntarily involved is an externality. There are some positive externalities and negative externalities.

Positive externalities: Where someone is involuntarily helped by the decisions others make.

Negative externalities: Pollution, traffic congestion, etc. Network externalities: The benefit that a member of a network receives when someone else joins that network. We’ll mostly be concentrating on the benefits part of that, with positive network externalities, but it doesn’t mean the negative network externalities does not exist, it still exist.

What is network?

1. A network may be closed or open.

This is very much like the idea of excludability. An open network is one that anyone can connect to. Nobody can deny access. A closed network is one which has someone who’s the gatekeeper, who can keep people from joining even if the gatekeeper chooses to allow access fairly freely.

1. A network may be sponsored or not.

A sponsored network has someone who is in some fashion “in charge” of the network, perhaps promoting or maintaining the network. Often that means that the sponsor can benefit from the network. Frequently, sponsored and closed go together, but it is possible to have a network which is sponsored and open.

1. A network may be one-sided or two-side.

In a classic market model, we see everything we need to predict quantity demanded. Without network externalities, we are not sure exactly how or when consumers will purchase the good, but we can be pretty confident about the quantity which will be purchased.

With network externalities, there are two different strong possibilities.

a. If quantity of people’s expectation less than the critical mass, people expect the product won’t be very popular, so the value from network externalities isn’t enough to make it worth the price. b. If quantity of people’s expectation exceeds the critical mass, people expect the product would be popular, so the value from network externalities makes it worth purchasing, it lead business to be success. Notice: the critical mass depends on price. If the price is lower, that can compensate for fewer people using the product and make it worthwhile to buy. If the price is higher, it would be different.

Demand equilibrium: In a market with network externalities, there is a demand equilibrium if the quantity demanded equals the expected quantity. 1) Q<Qx (left,bottom) Fewer people actually want to buy it than are expected to buy it. People will figure this out, and then the expected number of people will drop When the expected number of people drops, even fewer people want it. Overall the system moves down and left.

2) Q>Qx More people actually want to buy it than are expected to buy it. People will figure this out, and then the expected number of people will rise. When the expected number of people rises, even more people want it. Overall the system moves up and right.

3) Q<Qx (right,top) Fewer people want it than are expected. Again, overall it moves down and left.