Editing Network effect (section)

==Origins==
Network effects were a central theme in the arguments of [[Theodore Vail]], the first [[The Telephone Cases|post-patent]] president of [[Bell Telephone Company|Bell Telephone]], in gaining a monopoly on US telephone services. In 1908, when he presented the concept in Bell's annual report, there were over 4,000 local and regional telephone exchanges, most of which were eventually merged into the [[Bell System]].

Network effects were popularized by [[Robert Metcalfe]], stated as [[Metcalfe's law]]. Metcalfe was one of the co-inventors of [[Ethernet]] and a co-founder of the company [[3Com]]. In selling the product, Metcalfe argued that customers needed Ethernet cards to grow above a certain [[Critical mass (sociodynamics)|critical mass]] if they were to reap the benefits of their network.<ref>{{cite magazine |url=https://www.forbes.com/forbes/2007/0507/052.html |title=It's All In Your Head |magazine=Forbes |date=2007-05-07 |access-date=2010-12-10 |archive-date=2023-02-04 |archive-url=https://web.archive.org/web/20230204151758/https://www.forbes.com/forbes/2007/0507/052.html |url-status=live }}</ref> According to Metcalfe, the rationale behind the sale of networking cards was that the cost of the network was directly proportional to the number of cards installed, but the value of the network was proportional to the square of the number of users. This was expressed algebraically as having a cost of N, and a value of N<sup>2</sup>. While the actual numbers behind this proposition were never firm, the concept allowed customers to share access to expensive resources like disk drives and printers, send e-mail, and eventually access the Internet.<ref>{{cite journal |last1=Madureira |first1=António |author-link3=Bouwman, Harry |last2=den Hartog |first2=Frank |last3=Bouwman |first3=Harry |last4=Baken |first4=Nico |year=2013 |title=Empirical validation of Metcalfe's law: How Internet usage patterns have changed over time |journal=Information Economics and Policy |volume=25 |issue=4 |pages=246–256 |doi=10.1016/j.infoecopol.2013.07.002 }}</ref>

The economic theory of the network effect was advanced significantly between 1985 and 1995 by researchers Michael L. Katz, Carl Shapiro, Joseph Farrell, and Garth Saloner.<ref>{{cite book |title=The economics of standards: theory, evidence, policy |first=Knut |last=Blind |year=2004 |publisher=Edward Elgar Publishing |isbn=978-1-84376-793-0}}</ref> Author, high-tech entrepreneur [[Rod Beckstrom]] presented a mathematical model for describing networks that are in a state of positive network effect at BlackHat and Defcon in 2009 and also presented the ''inverse network effect'' with an economic model for defining it as well.<ref>{{cite magazine |url=https://www.forbes.com/2009/07/31/facebook-bill-gates-technology-security-defcon.html |title=How To Value Your Networks |magazine=Forbes |date=2009-07-31 |access-date=2010-12-10 |first=Taylor |last=Buley |archive-date=2023-02-04 |archive-url=https://web.archive.org/web/20230204151758/https://www.forbes.com/2009/07/31/facebook-bill-gates-technology-security-defcon.html |url-status=live }}</ref> Because of the positive feedback often associated with the network effect, [[system dynamics]] can be used as a modelling method to describe the phenomena.<ref>{{Cite web|last=Kumar|first=Ravi|date=2018-07-30|title=Understanding the basics of Network Effects — The Power of the Platform|url=https://medium.com/world-of-iot/understanding-the-basics-of-network-effects-the-power-of-the-platform-2cfef215fe4a|access-date=2020-10-30|website=Medium|language=en|archive-date=2023-02-04|archive-url=https://web.archive.org/web/20230204153349/https://medium.com/world-of-iot/understanding-the-basics-of-network-effects-the-power-of-the-platform-2cfef215fe4a|url-status=live}}</ref> [[Word of mouth]] and the [[Bass diffusion model]] are also potentially applicable.<ref>{{Cite web|last=Jorgenson|first=Eric|date=2020-05-06|title=The Power of Network Effects: Why they make such Valuable Companies, and how to Harness them|url=https://medium.com/evergreen-business-weekly/the-power-of-network-effects-why-they-make-such-valuable-companies-and-how-to-harness-them-5d3fbc3659f8|access-date=2020-10-30|website=Medium|language=en|archive-date=2023-02-04|archive-url=https://web.archive.org/web/20230204153349/https://medium.com/evergreen-business-weekly/the-power-of-network-effects-why-they-make-such-valuable-companies-and-how-to-harness-them-5d3fbc3659f8|url-status=live}}</ref> The next major advance occurred between 2000 and 2003 when researchers [[Geoffrey G Parker]], [[Marshall Van Alstyne]],<ref>{{Cite book|last1=Parker|first1=Geoffrey|last2=VanAlstyne|first2=Marshall|title=Proceedings of the 2nd ACM conference on Electronic commerce |chapter=Internetwork externalities and free information goods |date=2000-10-01|volume=2|pages=107–116|doi=10.1145/352871.352883|isbn=1581132727|s2cid=17807222|doi-access=free}}</ref>{{Primary source inline|date=May 2021}} Jean-Charles Rochet and [[Jean Tirole]]<ref>{{Cite journal|last1=Rochet|first1=Jean-Charles|last2=Tirole|first2=Jean|date=2003-06-01|title=Platform Competition in Two-Sided Markets|journal=Journal of the European Economic Association|volume=1|issue=4|pages=990–1029|doi=10.1162/154247603322493212|issn=1542-4766|doi-access=free}}</ref>{{Primary source inline|date=May 2021}} independently developed the [[two-sided market]] literature showing how network [[externality|externalities]] that cross distinct groups can lead to free pricing for one of those groups.

=== Evidence and consequences ===
[[File:Online Diversity.jpg|thumb|right|alt=Dynamics of activity on online platforms, as indicated via posts in social media platforms reveal long-term economic consequences of network effects in both the offline and online economy.|Clues about the long term results of network effects on the global economy are revealed in new research into Online Diversity.]]

While the diversity of sources is in decline, there is a countervailing force of continually increasing functionality with new services, products and applications — such as music [[Streaming media|streaming services]] (Spotify), [[file sharing]] programs (Dropbox) and [[Instant messaging|messaging platforms]] (Messenger, WhatsApp and Snapchat). Another major finding was the dramatic increase in the ''infant mortality'' rate of websites — with the dominant players in each functional niche - once established guarding their turf more staunchly than ever.

On the other hand, growing network effect does not always bring proportional increase in returns. Whether additional users bring more value depends on the [[commoditization]] of supply, the type of incremental user and the nature of [[Substitute good|substitutes]].<ref name="The Dynamics of Network Effects">{{Cite web |last1=Coolican |first1=D'Arcy |last2=Jin |first2=Li |date=2018-12-14 |title=The Dynamics of Network Effects |url=https://a16z.com/2018/12/13/network-effects-dynamics-in-practice/ |access-date=2022-04-07 |website=Andreessen Horowitz |language=en-US |archive-date=2023-02-04 |archive-url=https://web.archive.org/web/20230204153359/https://a16z.com/2018/12/13/network-effects-dynamics-in-practice/ |url-status=live }}</ref> For example, social networks can hit an inflection point, after which additional users do not bring more value. This could be attributed to the fact that as more people join the network, its users are less willing to share personal content and the site becomes more focused on news and public content.<ref name="The Dynamics of Network Effects"/>