Classroom Companion: Business

 
Chapter 9 · Network Effects

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9
suppliers becomes a de facto monopoly after all competitors have been squeezed 
out of the market. Positive feedback may govern the evolution of a single technol-
ogy (search engines), the evolution of a digital service (the World Wide Web), and 
the competition between technologies or companies providing digital services 
(Facebook vs Myspace).
9.3 
 Characteristics of Network Effects
The network effect may be time-dependent and may even change from positive to 
negative as the number of users of the game or service increases. One example is an 
interactive video game in which the gaming experience of the early game attracts 
more players. When the number of players increases, the game may become over-
crowded, causing players to leave the game, thereby shifting the network effect 
from positive to negative.
The network effect is measured by the amount of interactions or number of 
links in the network. This is proportional to the amount of use of the network 
resources which in turn is proportional to the time or amount of attention invested 
in the network by the users. Remember that attention is a scarce resource in much 
demand by the providers since user attention means opportunities for the providers 
to sell goods and services and thereby generate revenues.
The strength of the network effect is thus a direct measure of the number of 
links that each new user adds to the network. This is shown in 
.
Fig. 
9.6
, in which 
a new user (node) joining the network connects to three existing users, thereby add-
ing three new links to the network. It is not uncommon that a new user connects to 
all other users in the network. If a new user connects to exactly one other user in 
the network, there are no network effects. This is equal to the Sarnoff type of net-
work in 
7
Sect. 
9.6.2
.
Value networks in general and many digital services have strong network effects. 
Examples include Facebook, Twitter, YouTube, Uber, Airbnb, Skype, MMOGs 
(e.g., World of Warcraft), and smartphone app ecosystems.
Links between users may have different strengths depending on the importance 
of the relationship and volume of interaction between the users. Users may also 
have different importance in the network depending on how connected they are. 
Central users are users with a high number of links, while marginal users are users 
with a low number of links.
Positive network effects
Increased
value of
service
New users join
the service
. Fig. 9.5 Positive 
feedback. (Authors’
own figure)