Network Effect

A positive Network Externality

Applies to e.g.

  • Microsoft Office
  • Ebay seller ratings
  • Facebook
  • Multi-player online games
  • Bitcoin
  • Social networks

Economics

The higher the network size of a product, the higher the value, so people are willing to pay more. At the start of a network, the price being asked is higher than the value. This makes it hard to acquire customers, until the network size is sufficient and value is appropriate to price, this point is called Critical Mass.