Network effect

The network effect (also network effect ) is in the economics of the positive externalities. He describes that the benefits grows on a standard network or if the number of users increases. If the benefits for all users increases the number continues to grow, it is called positive feedback. If a critical mass is reached, the number of users increases exponentially.

The bandwagon effect is very different from the network effect, since in this common benefit is not the goal.

Direct and indirect network effects

Network effects can be differentiated into direct and indirect network effects. In case of direct network effects increase the benefits generated directly by physical network connections between two nodes. Indirect network effects exist when the utility of participants increases with the network size, these benefits increase, however, does not arise through direct communication relationships between the actors. Examples are complementary goods or learning effects.

Path dependence

The problem with the network effect is path dependence. Frequently it is more profitable and inefficient structures continue to develop as they abolish because they are already very widespread. This issue is relevant in competition law.

Monopoly

Markets where network effects play a role, often tend to form monopolies. Such markets, which have strong positive network effects are, therefore, often referred to as " tippy " means: "When two or more firms compete for a market where there is strong positive feedback, only one june emerge as a winner. It's unlikely did all will survive ", in German: ". , When two or more firms compete in a market where there is strong positive feedback, can only emerge victorious. It is unlikely that all will survive. "

Different standards or technologies often do not exist side by side, but it is made by a dominant standard or technology. Therefore, there are so-called winner-takes - it-all markets. These considerations are supported by observations on software markets. So it was in the eighties and nineties, for example in the range of office solutions still alternatives to Microsoft products such as Word Perfect in the field of text processing or 1-2-3 spreadsheet. With the open source community now exists in these markets essentially only a single, very strong competition for Microsoft.