Network Effects

For some kinds of choices, one has an obvious benefit when he/she aligns his/her actions with the actions of others. The “network effects” discussed in this work reflect this phenomenon. Its contribution to the predominance of one business or product over another as well as social value of a company relative to its network effect are the central issues addressed.

Network effects usually exert a positive influence on competition as the product becomes useful for both the consumers (the more users prefer the product the more available it becomes) and the company (the larger the user population becomes the more a new customer is willing to pay for the product). However, it is likely that one product will dominate the market “because there may be tipping effects where all the customers in a particular market decide to opt for the product of one firm or for one particular technology” (Whish & Bailey, 2012). The first product to reach its own tipping point draws a large number of consumers resulting in unattractiveness of competing product. “Being the first to reach this tipping point is very important — more important than being “best” in an abstract sense” (Easley & Kleinberg, 2010). The influence of network effect on a market can be illustrated by the rise of Microsoft, which dominates the market of personal-computer operating systems. Thus, consumers benefit from the dominance as a larger amount of software is written for Microsoft, and file formats are widely available.

Entrepreneurs’ primary objective is to operate a business which stays profitable for a long time. Apart from being a source of income, a business can promote social values that benefit others as well. Social values that a company promotes such as protecting environment, helping community or humanitarian help do not always attract a large number of customers to the company’s products. Therefore, socially conscious business cannot be solely based on its network effects.

All in all, it may be concluded that the large user population of a product or a company at a certain point leads to the dominance of the product or the company in its market. However, network effects of a business do not indicate that it is socially conscious.

References

Easley, D. Kleinberg, J. (2010). Networks, crowds, and markets: Reasoning about a highly connected world. New York: Cambridge University Press.

Whish, R., & Bailey, D. (2012). Competition law. Oxford: Oxford University Press.

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