Network effect

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/