Why Might a Profit-Maximizing Firm Producing a New Product with Network

question 16

Multiple Choice

Why might a profit-maximizing firm producing a new product with network externalities want to give its product away for free?

• A)To lock customers in then raise prices at a later date.
• B)Although this practice loses money, it can get the firm valuable publicity.
• C)By building market share, the product becomes much more valuable and the firm can make money by offering a premium version of the product for sale.
• D)The product becomes a more valuable place to advertise if it doesn't cost anything.
• E)A profit-maximizing firm would never give its product away for free.

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Definitions:

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A cognitive shortcut where the likelihood of an object belonging to a category is judged based on how similar it is to one's mental representation of that category.

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Representativeness Heuristic

A mental shortcut that involves making a probability judgment by comparing an object or event to a prototype of the object or event.