Network effect

Diagram illustrating the network effect in a few simple phone networks. The lines represent potential calls between phones. As the number of phones connected to the network grows, the number of potential calls available to each phone grows and increases the utility of each phone, new and existing.
Clues about the long term results of network effects on the global economy are reveled in new research into Online Diversity.
The dominant rail gauge in each country shown

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 effect

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Monopoly

Market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing.

This 1879 anti-monopoly cartoon depicts powerful railroad barons controlling the entire rail system.
Surpluses and deadweight loss created by monopoly price setting
A 1902 anti-monopoly cartoon depicts the challenges that monopolies may create for workers

Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words, the more people who are using a product, the greater the probability that another individual will start to use the product. This reflects fads, fashion trends, social networks etc. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft office suite and operating system in personal computers.

Vendor lock-in

In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products, unable to use another vendor without substantial switching costs.

The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).

The distributive property (cost to resist the locally dominant choice) alone is not a network effect, for lack of any positive feedback; however, the addition of bistability per individual, such as by a switching cost, qualifies as a network effect, by distributing this instability to the collective as a whole.

Positive feedback

Process that occurs in a feedback loop which exacerbates the effects of a small disturbance.

Alarm or panic can sometimes be spread by positive feedback among a herd of animals to cause a stampede.
Causal loop diagram that depicts the causes of a stampede as a positive feedback loop.
In sociology a network effect can quickly create the positive feedback of a bank run. The above photo is of the UK Northern Rock 2007 bank run.
Platelet clotting demonstrates positive feedback. The damaged blood vessel wall releases chemicals that initiate the formation of a blood clot through platelet congregation. As more platelets gather, more chemicals are released that speed up the process. The process gets faster and faster until the blood vessel wall is completely sealed and the positive feedback loop has ended. The exponential form of the graph illustrates the positive feedback mechanism.
A basic feedback system can be represented by this block diagram. In the diagram the + symbol is an adder and A and B are arbitrary causal functions.
Hysteresis causes the output value to depend on the history of the input
In a Schmitt trigger circuit, feedback to the non-inverting input of an amplifier pushes the output directly away from the applied voltage towards the maximum or minimum voltage the amplifier can generate.
A vintage style regenerative radio receiver. Due to the controlled use of positive feedback, sufficient amplification can be derived from a single vacuum tube or valve (centre).
The effect of using a Schmitt trigger (B) instead of a comparator (A)
Positive feedback is a mechanism by which an output is enhanced, such as protein levels. However, in order to avoid any fluctuation in the protein level, the mechanism is inhibited stochastically (I), therefore when the concentration of the activated protein (A) is past the threshold ([I]), the loop mechanism is activated and the concentration of A increases exponentially if d[A]=k [A]
Illustration of an R-S ('reset-set') flip-flop made from two digital nor gates with positive feedback. Red and black mean logical '1' and '0', respectively.
A phonograph turntable is prone to acoustic feedback.
Video feedback.
Positive feedback is the amplification of a body's response to a stimulus. For example, in childbirth, when the head of the fetus pushes up against the cervix (1) it stimulates a nerve impulse from the cervix to the brain (2). When the brain is notified, it signals the pituitary gland to release a hormone called oxytocin(3). Oxytocin is then carried via the bloodstream to the uterus (4) causing contractions, pushing the fetus towards the cervix eventually inducing childbirth.
During the Phanerozoic the biodiversity shows a steady but not monotonic increase from near zero to several thousands of genera.

Another sociological example of positive feedback is the network effect.

Track gauge

Distance between the two rails of a railway track.

Fish-belly cast-iron rails from the Cromford and High Peak Railway
An early Stephenson locomotive
Triple gauge, from left:,, and , on display at the China Railway Museum in Beijing
A cartoon depicting the horrors of goods transfer at the break of gauge at Gloucester in 1843
Cross-section of triple-gauge track at Gladstone and Peterborough, South Australia, before gauge standardisation in 1970 (click to enlarge)
Mixed gauge track at Sassari, Sardinia: and
Reconstructed mixed-gauge, / track at Didcot Railway Museum, England
Narrow gauge work train in an East Side Access cavern where standard gauge station for the Long Island Rail Road is nearing completion.
Engineers checking the gauge between rails at (England)

The value or utility a user derives from a good or service depends on the number of users of compatible products – the "network effect" in economics.

Business model

Organization creates, delivers, and captures value, in economic, social, cultural or other contexts.

Business model innovation is an iterative and potentially circular process
Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.
Example of Business Model Canvas.
Business model innovation types

Network effects business model

Critical mass (sociodynamics)

Sufficient number of adopters of a new idea, technology or innovation in a social system so that the rate of adoption becomes self-sustaining and creates further growth.

A fax machine

This is due to the fact that interactive media have high network effect, where in the value and utility of a good or service increases the more users it has.

Metcalfe's law

Proportional to the square of the number of connected users

Two telephones can make only one connection, five can make 10 connections, and twelve can make 66 connections.

Metcalfe's law characterizes many of the network effects of communication technologies and networks such as the Internet, social networking and the World Wide Web.

Two-sided market

Intermediary economic platform having two distinct user groups that provide each other with network benefits.

Figure 1: Cross-side and same-side network effects in a two-sided network.
Figure 2:Traditional pricing logic seeks the biggest revenue rectangle (price × quantity) under each demand curve.
Figure 3: So long as the revenue gained (red box) exceeds the revenue lost (light blue box), a discounting strategy is profitable. The subsidy largely changes network size.
Figure 4: In this market, consumers care more about access to critical features. The main effect of a subsidy is to change network value.

Two-sided markets represent a refinement of the concept of network effects.

Facebook

American online social media and social networking service owned by Meta Platforms.

Original layout and name of Thefacebook in 2004, showing Al Pacino's face superimposed with binary numbers as Facebook's original logo, designed by co-founder Andrew McCollum
Mark Zuckerberg's profile (viewed when logged out)
Mark Zuckerberg, co-creator of Facebook, in his Harvard dorm room, 2005
Billboard on the Thomson Reuters building welcomes Facebook to NASDAQ, May 2012
Oculus VR headset
Aerial view of Meta HQ in Menlo Park, California
Facebook CEO Mark Zuckerberg and Facebook executives with President Donald Trump in September 2019
Profile shown on Thefacebook in 2005
Previous Facebook logo in use from August 23, 2005, until July 1, 2015
Facebook login/signup screen
Human billboard advertising Facebook Canberra in the City page at the National Multicultural Festival
A Facebook "White Hat" debit card, given to researchers who report security bugs.
Map showing the countries that are either currently blocking or have blocked Facebook in the past
Facebook acquired Onavo's virtual private network to harvest usage data on its competitors.
Graffiti in Berlin of Facebook founder Mark Zuckerberg. The caption is a reference to George Orwell's novel Nineteen Eighty-Four.
Facebook on the ad:tech 2010
A man during the 2011 Egyptian protests carrying a card saying "Facebook,#jan25, The Egyptian Social Network"
Facebook parade float in San Francisco Pride 2014
Population pyramid of Facebook users by age {{as of|2010}}<ref>{{cite web|url=http://www.insidefacebook.com/2010/01/04/december-data-on-facebook%E2%80%99s-us-growth-by-age-and-gender-beyond-100-million/|title=December Data on Facebook's US Growth by Age and Gender: Beyond 100 Million – Inside Facebook|work=Inside Facebook|access-date=October 7, 2014}}</ref>

In The Facebook Effect, David Kirkpatrick stated that Facebook's structure makes it difficult to replace, because of its "network effects".

Porter's five forces analysis

Method of analysing the operating environment of a competition of a business.

A graphical representation of Porter's five forces

Demand-side benefits of scale – this occurs when a buyer's willingness to purchase a particular product or service increases with other people's willingness to purchase it. Also known as network effect, people tend to value being in a 'network' with a larger number of people who use the same company.