{"id":2444,"date":"2020-10-22T14:59:01","date_gmt":"2020-10-22T18:59:01","guid":{"rendered":"https:\/\/questromworld.bu.edu\/platformstrategy\/?page_id=2444"},"modified":"2022-09-12T15:23:24","modified_gmt":"2022-09-12T15:23:24","slug":"ombasimulation","status":"publish","type":"page","link":"https:\/\/questromworld.bu.edu\/platformstrategy\/ombasimulation\/","title":{"rendered":"Simulation for OMBA"},"content":{"rendered":"
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Monetization: Two-Sided Network Simulation<\/h1>\n

Optional \u2013 Demand Curves<\/b>
\nHere, we describe a single independent demand curve. You should understand this in order to understand coupled demand curves for the simulation in the next section. If you have had economics, feel free to skip or skim this section.
\nA demand curve represents graphically how much consumers will buy at a given price. The lower the price, the more they will buy. But, the lower the price, the lower is the profit per unit sold. The highest profit then balances competing pressures of trying to boost sales and trying to boost price. Everything is depicted in the figure below.
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\nIn the simulation below, you will be able to play with all the parameters shown here. In real life, the easiest thing to change is price. Normally, a company has great difficulty changing the maximum that consumers will pay for its product unless it changes the product. And a company has great difficulty changing the maximum size of the market, unless it finds a whole new market. The key concepts are the following:<\/p>\n

Profit<\/strong>: This is just (Price) x (Quantity).\u00a0 In the picture above, price = .2 and quantity = .8 so profit is (.2)(.8)=.16.\u00a0 Units could be tens of thousands or millions, etc so .16 in profit would be $1,600 or $160,000 etc.. In this example, we\u2019ve allowed marginal cost to be 0.\u00a0 This is pretty accurate for information goods such as tweets and Facebook posts.\u00a0 It\u2019s also true for many platforms like Airbnb and Uber, where the firm does not incur the cost of a stay or a ride.\u00a0 If you want to add costs, just calculate Profit = (Price \u2013 Cost) x (Quantity). Profit is the purple region of the plot.<\/p>\n

Consumer Surplus<\/strong>: This represents the value of the purchase to the consumer beyond what the consumer paid.\u00a0 Imagine you find a garment in your favorite store that has exactly the right fit and has great style.\u00a0 Before you check the price, you decide it\u2019s great but you won\u2019t pay more than $120.\u00a0 When you check the price, you find the store is charging $200.\u00a0 The clerk just won\u2019t negotiate so you walk away.\u00a0 Two weeks later, the garment is on sale for half price so you buy it.\u00a0 Your \u201csurplus\u201d is $20 since you would have paid $120 but, in the end, only paid $100. CS is the gold region of the plot.<\/p>\n

Deadweight Loss<\/strong>: This is a fancy economic term for profitable sales that could have happened but didn\u2019t. It\u2019s a specific kind of opportunity cost.\u00a0 In this region of the graph, there are consumers who would be willing to pay more than the firm\u2019s cost to produce the good but less than the price the firm is currently charging. So why doesn\u2019t the firm just charge less?\u00a0 The firm could lower price but then it would earn less from all the current customers who do pay the current price.\u00a0 Often a firm will try to capture this region by charging a high price initially then having a sale later but if consumers know this, they may choose to wait. DWL is the red region of the plot.<\/p>\n

Simulation 1 \u2013 Explore a Demand Curve<\/h2>\n

Before you change end points of the demand curve (max value or max size), see if you can adjust price<\/em> to maximize profits. The maximum you can achieve is (.25).<\/p>\n

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