A situation where the network dimensions of competition, such as the availability of complementary products, compatibility of these products, size of the network or installed base, are more important for competitive dominance than the product dimensions, such as price, quality or features.
Published in Chapter:
Network Effects and Market Outcomes
Erik den Hartigh (Delft University of Technology, The Netherlands)
Copyright: © 2008
|Pages: 8
DOI: 10.4018/978-1-59904-885-7.ch133
Abstract
Network effects occur when to an economic agent (e.g., a consumer of a firm), the utility of using a product or technology becomes larger as its network of users grows in size (Farrell & Saloner, 1985; Katz & Shapiro, 1985). The network effect may set in motion a positive feedback loop that will cause a product or technology to become more prevalent in the market. The presence of network effects may have large consequences for market outcomes (i.e., factors such as the speed of diffusion of products and technologies, the dynamics of the market shares of different competing products or technologies, and the predictability of market outcomes) (Arthur, 1989, 1996).