Classroom Companion: Business

9.2 · Positive and Negative Network Effects

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Facebook is an example where the value of the network increases as the number of 
users increases. The positive network effect is caused by positive feedback from the 
market.
Definition 9.3 Negative Network Effect
The network effect is negative if the market feedback causes a perceived decrease in 
value (e.g., fewer users) that stimulates further decrease in value (users).
Negative network effects occur, for example, toward the end of life for multiplayer 
online games: if the number of players leaving the game increases, more players are 
stimulated to leave the game. Another example is the standard war between VHS 
and Betamax where positive network effects in favor of VHS generated negative 
network effects for Betamax. This type of negative network effect is also driven by 
a positive market feedback (Øverby & Audestad, 
2019
).
These two cases are illustrated in 
.
Fig. 
9.4
.
The network effect is also negative if an increased number of users cause more 
dissatisfaction with the service, for example, because of traffic congestion in 
Internet routers or servers of social media. This case is a little more complicated 
than the previous one. If there are alternative providers offering the same or 
replaceable services, this may stimulate the users to switch to another provider. 
Take the competition between Netflix and Popcorn Time as example. Because of 
congestions in the servers of Netflix in 2014 and first half of 2015, several users 
switched to Popcorn Time even though Popcorn Time was illegal in most coun-
tries. This reduced the congestion on the Netflix servers so that the traffic toward 
Netflix again increased causing new congestion. This caused the traffic toward 
Netflix and Popcorn Time to oscillate (Idland et al., 
2016
). This situation ended in 
mid-2015 when the Popcorn Time service was taken down in most countries for 
legal reasons, and the capacity of the Netflix servers had been improved.
The outcome of this type of negative network effect can be that the market 
enters a chaotic or oscillating state where the market dominance is oscillating 
between two or more providers. The outcome may also be that the market reaches 
. Fig. 9.4 Result of 
positive and negative 
network effects.
(Authors’ own figure)