Network Effects and Market Outcomes

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Author(s): Erik den Hartigh (Delft University of Technology, The Netherlands)
Copyright: 2008
Pages: 8
Source title: Encyclopedia of Networked and Virtual Organizations
Source Author(s)/Editor(s): Goran D. Putnik (University of Minho, Portugal)and Maria Manuela Cruz-Cunha (Polytechnic Institute of Cavado and Ave, Portugal)
DOI: 10.4018/978-1-59904-885-7.ch133

Keywords: Information Science Reference / Media & Communications / Social Computing / Virtual Communities & Virtual Reality

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Abstract

Network effects occur when to an economic agent (e.g., a consumer of a firm), the utility of using a product or technology becomes larger as its network of users grows in size (Farrell & Saloner, 1985; Katz & Shapiro, 1985). The network effect may set in motion a positive feedback loop that will cause a product or technology to become more prevalent in the market. The presence of network effects may have large consequences for market outcomes (i.e., factors such as the speed of diffusion of products and technologies, the dynamics of the market shares of different competing products or technologies, and the predictability of market outcomes) (Arthur, 1989, 1996).

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