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Network effect

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A network effect, also called a network externality or a demand side economy of scale, describes how the value or usefulness a person gets from a good or service depends on how many other people use compatible products. These effects usually create a positive feedback loop, since each new user adds value for existing users and, at the same time, makes the product more attractive to people who have not yet joined. A direct network effect is one where a user's benefit rises with the number of people using the identical product, as with a telephone network or a social network, while an indirect network effect arises when at least two different, interdependent groups of users are involved, such as when hardware becomes more valuable as more compatible software becomes available for it. Network effects are distinct from ordinary economies of scale, since economies of scale lower a supplier's production costs as volume rises, while network effects instead raise a customer's willingness to pay as more people join; once a network passes a critical mass, a bandwagon effect can set in, creating self reinforcing growth that can, depending on how consumer expectations settle, lead to a small number of dominant providers. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/

Facts
Core Mechanism
A network effect operates because the value a user gets from a good or service rises with the number of other people already using compatible products, so early adoption creates a positive feedback loop in which each additional user makes the product more valuable to every other user, reinforcing further adoption. 1
Origin Year
1908 1
Connections

Associated With

Source Wikipedia, Network Effect
Source Wikipedia, Network Effect
Sources
1. Wikipedia, Network Effect
  • Lead section
    In economics, a network effect (also called network externality or demand-side economies of scale) is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products.
  • Lead paragraph, definition of network effect
    In economics, a network effect (also called network externality or demand-side economies of scale) is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive feedback systems, resulting in users deriving more and more value from a product as more users join the same network.
  • Associated With: Telecommunications Industry, Wikipedia lead; target 266366
    Direct network effects can be seen with social networking services, including Twitter, Facebook, Airbnb, Uber, and LinkedIn; telecommunications devices like the telephone; instant messaging services such as MSN, AIM or QQ; or even Wikipedia itself.
  • Associated With: Software Industry, Wikipedia lead; target 328918
    For example, hardware may become more valuable to consumers with the growth of compatible software.
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