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Network effect - Wikipedia, the free encyclopedia

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Network effects were more recently popularized by Robert Metcalfe, the founder of Ethernet.

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Network effect is a term used narrowly to describe business phenomena, or more broadly to describe non-business phenomena.

In the narrow usage, a network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.

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. The resulting bandwagon effect is an example of a positive feedback loop.

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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).

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At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service.

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