The 2006 introduction of Google Docs, an online alternative but compatible software to Microsoft...

Question:

The 2006 introduction of Google Docs, an online alternative but compatible software to Microsoft Office, forced Microsoft to develop new ideas to maintain its dominant market share. BBC News (May 12, 2010) reported that "Microsoft Takes Aim at Google Docs" by introducing a new online component with its Office 2010 product that offers the same features as Google Docs but with the familiarity of the Office software format. Why would the ability of Google Docs to read and edit a file created using Microsoft Office potentially cause the price of Microsoft Office software to fall? In your answer also describe another situation in which companies producing network goods have used different competition and/or price strategies to go ahead of their competitors.

Network goods

This refers to the goods/effect described in economics and business that an additional user of goods or services has on the value of that product to others.

Answer and Explanation:

a). Why would the ability of Google Docs to read and edit a file created using Microsoft Office potentially cause the price of Microsoft Office software to fall?

Answer:

Google Docs has greater features compared to the old version of Microsoft office software. Google Docs offers additional facilities in edition and reading a file along with available features in old Microsoft packages. Therefore, demand for Microsoft office software fell. Availability of the substitute good in the market is the main reason of this price fall. As demand is less than supply, producers are compelled to reduce price in order to clear the market until new products arrive in the market.

b)In your answer also describe another situation in which companies producing network goods have used different competition and/or price strategies to go ahead of their competitors.

Answer:

In order to retain market share in the competitive environment, big network goods suppliers often use bundle pricing as an alternative pricing strategy. Instead of discounting on each package, cable operators often offer discount on a combined package, where multiple products are offered to the consumers.


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