Network effect
From The Art and Popular Culture Encyclopedia
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Network effect is a term used narrowly to describe business phenomena, or more broadly to describe non-business phenomena.
In the narrow usage, a network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.
One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good — for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as
network externalities. The resulting bandwagon effect is an example of a positive feedback loop.
