Appendix B: Economic Foundations Reference

Key Economic Concepts

Market Structure Types

Perfect Competition: Many buyers/sellers, identical products, no barriers to entry
Monopolistic Competition: Many firms with differentiated products
Oligopoly: Few large firms dominating market (cloud computing)
Monopoly: Single seller with significant market power (search engines)

Cost Structure Fundamentals

Fixed Costs: Don't vary with output (software development, infrastructure)
Variable Costs: Change with production volume (server capacity, support)
Marginal Cost: Cost of producing one additional unit
Average Cost: Total cost divided by quantity produced

Network Effect Categories

Direct Network Effects: More users directly benefit existing users (messaging)
Indirect Network Effects: More users on one side benefit other side (platforms)
Local Network Effects: Benefits limited by geography (ride sharing)
Global Network Effects: Benefits accrue regardless of location (software)

Pricing Strategies

Cost-Plus Pricing: Cost + markup percentage
Value-Based Pricing: Price based on customer value received
Penetration Pricing: Low initial price to gain market share
Skimming Pricing: High initial price, lower over time
Dynamic Pricing: Real-time price adjustment based on demand

Mathematical Models

Metcalfe's Law

Network value grows quadratically with users: V = n²

Reed's Law

Network value grows exponentially with group formation: V = 2ⁿ

Customer Economics

LTV (Lifetime Value) = (Average Revenue Per User × Gross Margin) ÷ Churn Rate
CAC Payback = Customer Acquisition Cost ÷ (Monthly Revenue × Gross Margin)
LTV/CAC Ratio should exceed 3:1 for sustainable growth

Regulatory Frameworks

Antitrust Principles

Market Concentration: HHI index, market share analysis
Barriers to Entry: Capital requirements, network effects, regulatory hurdles
Consumer Welfare: Price effects, innovation impacts, choice availability

Data Protection Laws

GDPR: European data protection and privacy regulation
CCPA: California Consumer Privacy Act
Sector-Specific: HIPAA (healthcare), SOX (financial), others