Classroom Companion: Business

Law
Value of network (V)
Network effect (F)
Sarnoff’s law
n
1
Odlyzko-Tilly’s law
n ln n
ln n
Metcalfe’s law
n
2
n
Reed’s law
2
n
2
n
Modified Reed’s law
n
D
n
D − 1
0
2000
4000
6000
8000
10000
0
200
400
600
800
1000
Value
Users
Metcalfe
Odlyzko-Tilly
Sarnoff
. Fig. 9.13 Numerical 
examples of Metcalfe’s, 
Odlyzko-Tilly’s, and 
Sarnoff’s law. (Authors’ 
own figure)
9.6 · Estimating the Value of Networks

---

144
9
9.7 
 Conclusions
The key messages in this chapter can be summarized as follows.
5
In some markets, the temporal evolution of the market is stimulated by positive 
feedback from the market. This is what is called network effects. The most 
important source causing feedback is the number of customers joining or leav-
ing the market.
5
The network effect is positive if an increase in the number of customers causes 
further increase in the number of customers.
5
The network effect is negative if customers leaving the market stimulate other 
users to do the same. The network effect is also negative if an increase in the 
number of customers reduces the quality of the service, stimulating users to 
leave the market.
5
The market may oscillate or become chaotic if there is significant delay from 
cause to action.
5
Both negative and positive network effects are caused by positive feedback from 
the network. Negative feedback stabilizes the market at a nominal level; that is, 
counteracting any fluctuations away from stability.
Network effects are common in the digital economy and are, as such, important for 
strategic business analysis in several digital markets. An important observation is 
that markets with strong positive network effects grow very slowly initially and 
may be abandoned prematurely.
The network effects depend on the interactions between the customers. There 
are three basic types of markets:
5
There is no interaction between customers—leading to Sarnoff’s law.
5
The customers interact in pairs—leading to Metcalf’s and Odlyzko-Tilly’s laws.
5
The customers interact in groups—leading to Reed’s law.