{"id":210,"date":"2018-06-14T19:04:28","date_gmt":"2018-06-14T19:04:28","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch06\/"},"modified":"2026-02-03T15:52:15","modified_gmt":"2026-02-03T15:52:15","slug":"ch06","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch06\/","title":{"raw":"6.1 Introduction","rendered":"6.1 Introduction"},"content":{"raw":"
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Learning Objectives<\/span><\/p>\r\n\r\n<\/header>\r\n

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After studying this section you should be able to do the following:<\/p>\r\n\r\n

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  1. Define network effects.<\/li>\r\n \t
  2. Recognize products and services that are subject to network effects.<\/li>\r\n \t
  3. Understand the factors that add value to products and services subject to network effects.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n

    Network effects<\/a><\/span> are sometimes referred to as \u201cMetcalfe\u2019s Law\u201d or \u201cNetwork Externalities.\u201d But don\u2019t let the dull names fool you\u2014this concept is rocket fuel for technology firms. Bill Gates leveraged network effects to turn Windows and Office into virtual monopolies and in the process became the wealthiest man in America. Mark Zuckerberg of Facebook, Pierre Omidyar of eBay, Caterina Fake and Stewart Butterfield of Flickr, Kevin Rose of Digg, Evan Williams and Biz Stone of Twitter, Chris DeWolfe and Tom Anderson\u2014the MySpace guys\u2014all of these entrepreneurs have built massive user bases by leveraging the concept. When network effects are present, the value of a product or service increases as the number of users grows<\/em>. Simply, more users = more value. Of course, most products aren\u2019t subject to network effects\u2014you probably don\u2019t care if someone wears the same socks, uses the same pancake syrup, or buys the same trash bags as you. But when network effects are present they\u2019re among the most important<\/em> reasons you\u2019ll pick one product or service over another. You may care very much, for example, if others are part of your social network, if your video game console is popular, if the Wikipedia article you\u2019re referencing has had prior readers. And all those folks who bought HD DVD players sure were bummed when the rest of the world declared Blu-ray the winner. In each of these examples, network effects are at work.<\/p>\r\n\r\n

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    Not That<\/em> Kind of Network<\/h4>\r\n

    The term \u201cnetwork\u201d sometimes stumps people when first learning about network effects. In this context, a network doesn\u2019t refer to the physical wires or wireless systems that connect pieces of electronics. It just refers to a common user base that is able to communicate and share with one another. So Facebook users make up a network. So do owners of Blu-ray players, traders that buy and sell stock over the NASDAQ, or the sum total of hardware and outlets that support the BS 1363 electrical standard.<\/p>\r\n\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n

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    Key Takeaway<\/span><\/p>\r\n\r\n<\/header>\r\n

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