Classroom Companion: Business

9.2 
 Positive and Negative Network Effects
Network effects may be visualized using undirected networks illustrated in 
.
Fig. 
9.1
. Network A has 3 nodes and 3 links, network B has 7 nodes and 11 
links, and network C has 11 nodes and 21 links. The nodes may be individual con-
sumers or users of a specific digital service, and the links may represent the interac-
tion between the users, e.g., trading, communication, or any other common interest. 
Not every pair of node needs to be connected in these networks. Networks may be 
 
Chapter 9 · Network Effects

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small—as those depicted in 
.
Fig. 
9.1
—or large such as Facebook, with more 
than two billion nodes (users). The number of links is a measure of the value of a 
network and is the essential mechanism creating network effects. Another impor-
tant concept of networks is the distance between two arbitrary nodes; that is, the 
smallest number of links that must be traversed when travelling from one node to 
the other. This distance is important when evaluating how fast innovations diffuse 
in networks. The concept is discussed in 
7
Box 
9.1
.
Box 9.1 Six Degrees of Separation
Six degrees of separation is the concept 
that any human being is (at the most) 
six intermediaries away from any other 
human on Earth. That is, anyone can 
connect to any other person through a 
chain of friends with a maximum of six 
hops. This is illustrated in 
.
Fig.
9.2
. 
While by some considered to be an 
urban myth, research has shown that 
the six degrees of separation concept is 
valid in many social networks.
The theories of a “shrinking world” 
were first popularized by the Hungarian 
author Frigyes Karinthy in 1929. 
Karinthy argued that the modern world 
at that time was shrinking, primarily 
because of recent innovations in com-
munications such as the telegraph, 
radio, and telephone. In his paper “The 
Small World Problem” published in the 
journal Psychology Today in 1967, 
Stanley Milgram showed experimen-
tally that this was indeed true. He found 
that the average social distance between 
two randomly chosen individuals in the 
USA was 5.2 (Milgram, 
1967
). His 
observations later became known as the 
“six degrees of separation” concept. 
Stanley Milgram did not use this term 
himself; the popularization of the term 
is attributed to John Guare and his play 
“Six Degrees of Separation” from 1990.
Other concepts related to the “six 
degrees of separation” are the Erdös 
number describing the collaboration dis-
tance to the mathematician Paul Erdös 
based on shared publications (The Erdös 
Number Project. Oakland University., 
n.d.
) and the Bacon number describing 
the distance to the American actor 
Kevin Bacon based on shared movie 
appearances. The collaboration dis-
tances are amazingly small even between 
people having published in completely 
. Fig. 9.1 Undirected networks. (Authors’ own figure)