Classroom Companion: Business

9.3 · Characteristics of Network Effects

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A network may also be clustered, meaning that there exist clusters of networks 
within the network. One example of this is social media, where individuals residing 
within a country are more connected with each other than with individuals outside 
their country. Furthermore, within the same country, people are more connected 
with each other within the same town or city. Clusters may also appear among 
families, friends, and other socioeconomic groups, for example, workplaces and 
people that have similar interest. This leads to networks of networks with poten-
tially many layers of clusters.
Networks are often modeled as undirected (or symmetrical) networks. However, 
the interaction between two users may be asymmetric—a user sends more informa-
tion to another user than he receives in return. Asymmetric users are widespread in 
digital services like YouTube and Twitter, where relatively few users are generating 
content that is spread to the rest of the network.
.
Figure 
9.7
shows two competing social networking services (A and B). The 
figure introduces the terminology of Frank Bass—imitators and innovators (see 
7
Chap. 
18
). The buying habit of imitators is that they listen to advice from others 
(i.e., word-of-mouth) and are therefore likely to buy the version of the product 
owned by most other people. The imitator in the figure therefore chooses social 
network service A. The innovators do not listen to advice and buy the product of 
their liking. The imitators then represent a network effect, in which the value of the 
product as perceived by the imitators increases as more people use the service. The 
buying habits of innovators are not ruled by network effects.
Note that the “network” in this context does not refer to physical networks but 
to relational networks between users; for example, between players of the same 
online game, people and organizations exchanging emails, family groups, or friends 
on Facebook. For digital services, the underlying physical network is, however, a 
prerequisite for the existence of the social network. However, sometimes, network 
effect may refer to the popularity or ill repute of the physical network.
.
Figure 
9.8
 illustrates one of the strategic dilemmas associated with strong 
network effects. The figure shows two curves. The S-shaped curve is the evolution 
of a market with only imitators, and the second curve shows the evolution if there 
. Fig. 9.6 Adding a new node and links to a network. (Authors’ own figure)