Pedro Arantes
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Network Effects

Network effects occur when a network's value increases for users as more people begin using it.
#business
Zettelkasten, August 19, 2021

Notes

  • Network effects occur when a network's value increases for users as more people begin using it.

  • The adoption of a product by an additional can create two effects:

    • Total effect: increase the value to all other users;
    • Marginal effect: enhances other non-users' motivation for using the product.
  • As the network becomes more valuable with each new adopter, more people tend to use the network, resulting in a positive feedback loop.

    • Airbnb, for example, increases its value as more people use it. The network effect happens because if more people use it, more people want to offer their places, attracting more people.
  • The network effect is an entrance barrier because it's difficult for competitors to enter the market and compete with a company that already has a good network. This advantage is also known as the first-scaler advantage.

  • Social networks, as Facebook or Twitter, are good examples of the network effect.

References

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