Network Effect

In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.

The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter, Facebook, and Google+ being more useful the more users join.

The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion).

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop.

Read more about Network EffectOrigins, Benefits, Technology Lifecycle, Lock-in, Types of Network Effects, Negative Network Effects, Open Versus Closed Standards, Examples

Other articles related to "network effect, network, network effects":

Returns To Scale - Network Effect
... Network externalities resemble economies of scale, but they are not considered such because they are a function of the number of users of a good or service in an industry, not of ... of scale external to the firm (or industry wide scale economies) are only considered examples of network externalities if they are driven by demand ...
Network Effect - Examples - Rail Gauge
... There are strong network effects in the initial choice of rail gauge, and in gauge conversion decisions ...

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