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).




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
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Year: 2005
Pages: 260

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