L6 NETWORK EFFECTS AND INFORMATION ASYMMETRY Flashcards
What is an externality?
An externality is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party’s activity
What is the network effect in economics?
The network effect is the phenomenon where the value a user derives from a good or service depends on the number of users in the network.
How do network effects typically influence user value?
Network effects typically result in users deriving more value from a product as more users join the same network.
What does Metcalfe’s law state?
Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users.
Why might some social networks not exactly match Metcalfe’s law?
Some new nodes may not create connections with all existing nodes, decreasing the overall benefit of each additional user.
What is a one-sided network?
A one-sided network is a network in which connections are made within one group of homogeneous users.
What is a two-sided network?
A two-sided network is a network in which connections are made between two groups of users that need each other.
What is a key indicator of Facebook’s network value?
The number of friendships (connections between users) better reflects Facebook’s network value than just the number of users.
How did the number of friendships on Facebook change as the platform grew?
The number of friendships initially grew proportionally with the number of users, but as the network became more complex with social activities (like joining groups and following pages), the rate of friendship growth slowed down.
What shift in user behavior on Facebook affected the number of friendships?
Users started spending more time consuming digital content (scrolling through feeds) rather than adding new friends.
How is Facebook’s market value linked to its network value?
Facebook’s market value is more accurately reflected by the connections between users, as more connections lead to higher engagement and better monetization.
What is signalling?
Action taken by the informed party to reveal private information or indicators of hidden characteristics to the
uninformed party
