21.8 Business Application: Network Externalities and the Battle between Microsoft and Apple: Many markets related to technology products operate in the presence of network externalities because the value of such products to consumers depends on how many other consumers are in the “network” of consumers.

For instance, an Internet connection would not be nearly as useful if no one else in the world was connected to the Internet; a telephone becomes more useful the more other people also have telephones; and a computer operating system becomes more useful the more others use it because then the market for software that runs on this operating system increases, which in turn fosters greater software innovation for that platform. Assume throughout that we are analyzing the consumer market for computers and that a consumer buys at most one computer.

A. Consider the market for PCs when the Microsoft Windows system first competed with the Apple Macintosh platform in the 1980s. Microsoft and Apple pursued very different strategies: Microsoft licensed the Windows platform to lots of PC makers who competed with one another and thus drove down the price of PCs. Apple, on the other hand, did not license its Macintosh operating system and sold it only with its own Apple computers that were more expensive.