From the 1980s, network effects attracted a lot of interest in economics and management sciences. This was mainly due to the work of Arthur (e.g., 1988, 1989, 1990). While the subject of increasing returns to scale in companies had a long tradition in economics, network effects (i.e., increasing returns in markets) had hardly been addressed.
Key Terms in this Chapter
Indirect Network Effects: The increase in the economic utility of a product or technology as more customers start using complementary products or as more suppliers start offering complementary products, is referred to as an indirect network effect. It is also referred to by others as a market-mediated network effect or the hardware-software paradigm.
Product-Related Network Effects: When the economic utility of a product increases as more customers start using products based on the same technological standard, this is referred to as a product-related network effect.
Metaphorical (Virtual) Networks: Networks in which there are no physical connections (e.g., the network of Apple computer users or the network of Ford motorcar owners).
Direct Network Effects: When the economic utility of a product or technology increases as more customers start using it, this is referred to as a direct network effect.
Literal (Physical) Networks: Networks in which participants are literally (i.e., physically) connected to each other (e.g., the telephone network, the cable television network).
Technology-Related Network Effects: When the economic utility of a technology increases as the network of adopters of this technology and of complementary technologies grows in size, this is referred to as a technology-related network effect.
Network Effects: These occur when, to an economic agent (e.g., a consumer or a firm) the economic utility of using a product or technology increases as its network of users grows in size.