Network theorems associated with the success of Kindle Fire
Network theorems associated with the success of Kindle Fire
Source: http://blogs.hbr.org/hbsfaculty/2011/10/ten-reasons-amazon-kindle-fire.html
http://www.cs.cornell.edu/home/kleinber/networks-book/networks-book-ch17.pdf
In the article, ’10 reasons Amazon’s Kindle Fire will Make a Huge Dent in the iPad market’, Sunil Gupta gives 10 reasons for why Kindle Fire will succeed. The first important reason is that Kindle Fire is much cheaper than iPad. The second important reason is that publishers and other content provider are keen to see Amazon succeed in order to balance Apple’s negotiating power. The third reason is that Kindle was already popular with customers in spite of the success of iPad. The fourth reason is that Amazon is no less an icon of excellent customer service than Apple. The fifth reason is that according to a survey of 12,000 readers, the Wall Street Journal found that almost 64% were willing to buy the new Kindle.
By what we have learned in class, we can know whether these reasons can really make Kindle fire succeeds. As we all know in the Economy with Network Effects, with network effects, a potential purchaser takes into account both her own reservation price and the total number of users of the good. A simple way to model this is to say that there are now two functions at work: when a z fraction of the population is using the good, the reservation price of consumer x is equal to r(x)f(z), where r(x) as before is the intrinsic interest of consumer x in the good, and f(z) measures the benefit to each consumer from having a z fraction of the population use the good. Since a consumer’s willingness to pay depends on the fraction of the population using the good, each consumer needs to predict what this fraction will be in order to evaluate whether to purchase. Suppose the price of a product is P*, and consumer x expects a z fraction of the population will use the good. Then consumer x will want to buy if r(x)f(z) is larger than P*. The reason why other tablets cannot beat iPad is that the price of them is the same as iPad and the total number of users of the good is much less than iPad. Under this situation, consumer will choose iPad without doubt. However, based on the first reason and the fifth reason, we can know that Kindle Fire has a low price and a lot of people will buy it. So r(x)f(z) of a consumer will be much higher than the P* of a good. Taking this into consideration, it is obvious that Kindle Fire will succeed.
The third reason and fourth reason are associated with Information Cascade. As we all know in Information Cascade, when people are connected by network, it becomes possible for them to influence each other’s behaviors and decisions. And people make decisions sequentially, basing these decisions on a combination of their own price and observation of what earlier people have done. Since Amazon has a good reputation and Kindle have already been popular with people, the first people in the network will choose to buy it at a big chance. Then the second people in the network has the private signal that Kindle Fire is good and the High signal from person 1, so the second people will buy it. For the third people in the network, he has two high signals from people 1 and people 2, no matter what his private signal is, he will choose buy Kindle Fire. Under this situation, a cascade occurs which will make people in the network to buy Kindle Fire. Taking this into consideration, Kindle Fire will succeed.
The second reason is associated with Bargaining and Power in Networks. Since Apple has connections to all kinds of publishers and content providers and publishers and content provides can only negotiate with Apple, Apple has powerful position which it can gains most of the profit. Under this situation, publishers and content providers will support Kindle Fire to balance Apple’s power.
Taking all these into account, some of reasons in the article are right and Kindle Fire will succeed without no doubt.