Network Effects

Question 1

What are Direct network and Indirect Network effects?

Answer 1

Direct network effects: network externalities that arise from the direct interaction of users.
Metcalf’s law: the value of a telecommunication network is proportional to the square of the number of devices in the network.

Indirect network effects: network externalities that arise when the presence of Complementary Products increases a product value. (adv. companies)

For network effects to be a competitive advantage beware of:

• Switching costs
• Multi-homing