Notes
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Network effects occur when a network's value increases for users as more people begin using it.
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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.
- Upon reaching critical mass, a bandwagon effect can result.
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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.
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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.
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Social networks, as Facebook or Twitter, are good examples of the network effect.