Network Effect
Definition
From the Wikipedia at http://en.wikipedia.org/wiki/Network_effect
"The network effect is a characteristic that causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service.
One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good - for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities."
Description
From Mark Cooper:
"Network effects, also known as demand side economies of scale, occur when the costs of producing or the benefits of consuming a good spill over onto those who are producing or consuming the good, beyond the transaction. The benefits of the network effect accrue to members of the network, directly or indirectly. The classic example of a direct network effect is a telephone. The value of the telephone grows as the number of people on the network increases due to the increasing number of reachable people. The classic example of an indirect network effect is software. The value of an operating system goes up as the number of people using it increases because more companies produce applications for it. Although there is no direct connection between the members of the network, the benefits still accrues to network members. Frischmann argues for an additional distinction “between network effects and infrastructure effect.” The externalities of public and social infrastructures are diffuse because they “positively affect the utility of nonusers, that is, members of society who are not using the infrastructure itself also benefit.” Frischmann gives both a social and economic example of these diffuse externalities. So-cially, the increase in political discourse among Internet users also benefits non-users." (http://cyberlaw.stanford.edu/system/files/From+Wifi+to+Wikis+and+Open+Source.pdf)
Typology
13 types of network effects, well explained in this video: https://www.youtube.com/watch?time_continue=27&v=oB_NM_kL6rM [1]
Examples
"eBay is an excellent example of the network effect in action. This service would have only limited appeal if the auction market was limited by geography or by categories of people. As it turns out, anyone connected to the Internet can be a seller and anyone can browse, bid and buy. Therefore even the most obscure item for sale (like this series of items for railroad buffs of the now defunct Great Northern Railroad) are available to the tiny number of potential buyers for these types of trinkets.
An online directory service such as LinkedIn increases its usefulness as more and more people participate, complete their online profile, expand their network and link to others and so forth. A LinkedIn directory with just a handful of participants wouldn't be much use to anyone." (http://www.wsjb.com/RPC/V1/Participation%20Applications.html)
More Information
- More information at the Wikipedia article at http://en.wikipedia.org/wiki/Network_effect
- Personal Network Effect