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ATT Creates Network Externalities

AT&T Creates Network Externalities

AT&T has a new marketing plan whereby customers pay a flat fee to make unlimited calls to other AT&T customers. ^[6] Before the implementation of AT&T’s plan, there were no network externalities to your choice of long-distance telephone carrier. If everyone else in the world but you used AT&T, you still had no compelling reason to switch. Under AT&T’s plan, however, you would want to use them if everyone else you knew also did.

Your friends are more likely to call you if they don’t have to pay for the privilege. Consequently, the more of your friends who get this plan, the greater incentive for you to adopt it as well. AT&T has thus created an artificial reason for you to go with the most popular provider (among your friends ) rather than the best long-distance carrier.

What would happen if all the major long-distance companies created artificial network externalities? Would this make them all better off, or would the effects of each plan cancel out? As we have explained, price competition is terrible for companies. When all companies compete on price, they are all worse off. Long-distance phone service is pretty homogenous, with services differing only on price. Long-distance companies, consequently, should desperately try to get consumers to make choices based upon factors other than price. If all the major carriers adopted AT&T’s approach, then most consumers would not make their long-distance choice based upon price, but rather on which plan most of their friends and associates have. As a result, long-distance firms would benefit by all adopting complicated pricing plans that create network externalities.

Network externalities often lead to a winner-take-all situation where only one firm prosperously survives. Government regulation, however, makes it unlikely that one carrier would ever be allowed to become a monopoly, since U.S. telephone service is heavily regulated , and regulators generally try to discourage monopolies.

^[6] MSNBC.com (February 6, 2002).

High-Definition TV

Coordination failures prevent Americans from enjoying high-definition TV. Consumers will buy high-definition TVs only if they can use them to watch high-definition TV shows. Unfortunately, it’s expensive for broadcasters to transmit high-definition signals, so they will only transmit when enough consumers have bought compatible TVs. When everyone waits for everyone else to start, however, not much happens.

The U.S. Congress tried to ensure the spread of high-definition TV by giving broadcasters the rights to billions of dollars of spectrum in return for the broadcasters promising to transmit high-definition signals. The broadcasters, however, used their political power to get out of the deal, so now they intend to use their spectrum mostly to send multiple low-definition signals rather than one high-definition transmission.

Money

Money acquires value through network externalities . Dollars are mere pieces of pretty paper that are useful because people value them. You can’t eat, wear, or watch money. Yet most people actually prefer their employer to compensate them with money rather than with something more inherently useful like rice or books on game theory. If the entire human race save you became extinct, money would no longer hold any value to you, but rice would. Money has value because other people want it.

Because so many people want money, it’s useful to have it because you can trade money for goods and services. Thus, our use of money is based upon a massive coordination game.

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ATT Creates Network Externalities