INSY 2301 Lecture Notes - Lecture 8: Backward Compatibility, Network Effect, Ebay
22 Jun 2018
School
Course
Professor
Understanding Network Effects
Network Effects
Network effects (network externalities) occur when the value of a product/service
increases as the number of users expands
Products/services subject to network effects foster exchange, which creates value
oNetwork effects do not apply to all products
Can often be more effective than traditional marketing efforts due to the strength of
personal recommendations (viva voce - the living voice)
Key Concepts
Staying Power: The long-term viability of a product or service
oNetworks with greater numbers of users have greater staying power
Switching Costs: Costs incurred when moving from one product/service to another
oDirectly related to staying power
Total Cost of Ownership (TCO): A measure of the full cost of owning a product
Complementary Benefits: Products or services that add additional value to a primary
product/service
oValue-adding sources reinforce one another and the primary product to
strengthen network effects
oPlatforms: Allow for the development and integration of software products and
other complementary goods
Network Markets
A one-sided market derives most of its value from a single class of users
oSame-Side Exchange Benefits: Benefits derived by interaction among
members of a single class of participants
A two-sided market is comprised of two distinct categories of participant
oBoth participant categories need to deliver value for the network to function
oCross-Side Exchange Benefit: An increase in the number of users on one side of
the market (i.e. eBay sellers), creating a rise on the other side (i.e. eBay buyers)
Both market types experience early, fierce competition
oCaused by the positive-feedback loop that is inherent in network effects
oFirms are aggressive early on to gain leadership; once a leader becomes clear,
consumers begin to favor the leading product over rivals
Firms can expand by redefining the market to bring in new categories or users
oConvergence occurs when two or more distinct markets begin to offer similar
features and capabilities
find more resources at oneclass.com
find more resources at oneclass.com
