Classroom Companion: Business

 
Chapter 9 · Network Effects

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On the other end of the scale are vague and less obvious network effects. These 
include bandwagon effects and tech-performance network effects. Bandwagon 
effects include the social pressure to join a service or buy a good because everyone 
else is using it. Tech-performance network effects include the effect that an increased 
number of users have on the performance of a technology or service. Tech- 
performance network effects are in general easier to identify and measure com-
pared to bandwagon effects. An example of tech-performance network effects is 
peer-to-peer file sharing services such as BitTorrent. New users joining the 
BitTorrent network result in, on average, reduced download times and potentially 
an increased amount of available content for other users of the service. Bandwagon 
and tech-performance network effects are usually indirect.
Another type of network effects is data network effects, in which data collected 
about users or user behavior is used to improve digital services. Google Search is an 
example of data network effects since each search query contributes to refining the 
Google Search algorithm. Another example is recommendation systems based on 
input or feedback from users.
9.4 
 Direct and Indirect Network Effects
Network effects may be direct or indirect: direct network effects take place when 
users induce value on other users by the means of direct interaction between the 
users; indirect network effects take place when the aggregated behavior of the users 
induces value on other users. For example, in the case of positive direct network 
effects, users benefit from other users in the network because they have more 
options for direct interaction. In the case of positive indirect network effects, users 
benefit from other users because they, collectively, provide value that is somehow 
appreciated by all users in the network without any direct interaction between the 
users taking place. Examples of direct network effects are interactions among 
members of social media, between smartphone users, and between buyers and sell-
ers in multisided markets. Examples of indirect network effects are improvements 
of service quality due to user feedback, product reviews, and bandwagon effects.