Network Effect

In economics and business, the term “network effect” describes the phenomenon of a prod- uct or service becoming more valuable when more users or customers are owning or using it. Another term in use is “network externalities.” In many cases, these network externalities are embedded in the value of the goods or services and are designed to benefit from this effect through scaling. Classic examples of the network effect are the telephone or Internet services. The concept of the network effect in economics is closely related to network theory in sociology. Social network analysis provides a useful set of theoretical methods to deepen insights into net- work effects and assess the properties of networks and externality effects. Today, the network effect is increasingly discussed in relation to social networks, unintended consequences of big data, and effects witnessed in the field of blockchain technology and cryptocurrency.