Chapter 9 - Network Effects Flashcards
What are network effects?
They refer to the effect that the number of users of a service has on the value of that service as perceived by each user.
It is the demand-side economy of scale effect. (The supply-side is related to reduction of AC through increase of production quantity.)
Which is the formula to calculate the degrees of separation?
D = ln(N)/ln(K)
where:
- N: number of nodes (users)
- K: average number of links per node (Facebook friends, for example)
What about the Dunbar’s number?
It is a calculated number of the average number of people to be considered as “friends” by someone. (150)
When is a network effect called positive?
It is called positive when the market feedback causes perception related to increase in network value (users), which in turn causes an increase in users (network value).
When is a network effect called negative?
It is called negative when the market feedback causes a perception related to decrease in network value (users), which in turn causes a decrease in users.
By which kind of feedback are both positive and negative network effects strengthened?
What is the final stage of a market subject to this kind of feedback?
By the so-called positive feedback, which increases the magnitude of the change in output, independently of which direction (+ or -).
The final stage is market saturation. Moreover, we have the “stronger gets stronger” phenomenon.
Provide an example of positive feedback?
The “pork cycle” in the beginning of each decade of the XX century where a deficiency of pork meat caused higher prices and a decrease in demand for one year, causing overproductivity (and higher prices) in the next year.
Can network effects be influenced by time?
Yes. Example: videogame users increase after release due to positive network effects, but then some leave switching to negative network effects. (both driven by positive feedback).
Which effect cause innovators in the choice of network effects to join?
Positive network effect which increases the number of users of minor networks through joining of imitators.
Which is the difference between direct and indirect network effects?
Direct: users get more value from an increase in the number of users inside the network because of the more possibilities of direct interaction.
Indirect: users get more value from an increase in the number of users inside the network because of the aggregated behaviour of the users (reviews, feedbacks) help the network provider to improve the quality of the experience.
Which is the difference between same-side and cross-side network effects? Examples
Same-side: users of one user group get value from the increase of users in the same user group. Example: telephone, social networks, multiplayer online games.
Cross-side: users of one user group get value from the increase in users in another user group. Example: hardware and software goods; smarphones and apps.
