Due to network effects, as the price of a service (or product) is reduced, which of the following is false?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statement is false regarding network effects as the price of a service or product is reduced.
Option 1: 'The two equilibria would get closer.' This is the candidate false statement. In a network-effects setting with multiple equilibria, lowering price typically strengthens adoption and reinforces the momentum toward a higher, more valuable network. This tends to push the high adoption equilibrium higher and the low adoption equilibrium lower, effectively widening the gap between equilibria rather than narrowing it. So describing the equilibria as getting closer is inconsistent with the reinforcing nature of network effects.
Option 2: 'If the firm is able to get past the critical point, the eventual size of its user population would be even larger.' This aligns with the idea of tipping points in network effects: crossing a critical threshold often leads to a cascade toward a larger user base, increasing the final size beyond the initial equilibrium.
Option 3: 'The low equilibrium would become lower, this provides a critical point that is easier to get past.' This makes sense in a typical two-equilibria scenario with increasing returns: lowering price can push the system further toward the low equilibrium, making the barrier to tipping into the high equilibrium more navigable or salient, thus the low equilibrium deepens and the critical point becomes more accessible.
Option 4: 'The high equilibrium would become higher.' This follows from positive feedback in networks: as more users join, the value increases, attracting even more users, so the high equilibrium rises further.
In summary, the false claim is that the two equilibria would get closer, whereas the logic of network effects with price reductions generally predicts a widening gap between the low and high equilibria due to reinforcing adoption dynamics.

Due to network effects, as the price of a service (or product) is reduced, which of the following is false? Single choice

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