Types of Network Effects
There are many ways to classify networks effects. One popular segmentation views network effects as being of four kinds:
- Two-sided network effects: An increase in usage by one set of users increases the value to and participation of a complementary and distinct set of users, and vice versa. An example is developers choosing to code for an operating system with many users, with users choosing to adopt an operating system with many developers. This is a special case of a two-sided market.
- Direct network effects: An increase in usage leads to a direct increase in value for other users. For example, telephone systems, fax machines, and social networks all imply direct contact among users. In two-sided networks, a direct network effect is called a same-side network effect. An example is online gamers who benefit from participation of other gamers as distinct from how they benefit from game developers.
- Indirect network effects: Increases in usage of one product or network spawn increases in the value of a complementary product or network, which can in turn increase the value of the original. Examples of complementary goods include software (such as an Office suite for operating systems) and DVDs (for DVD players). This is why Windows and Linux might compete not just for users, but for software developers. This is more accurately called a cross-side network effect in order to distinguish network benefits that cross distinct markets.
- Local network effects: The structure of an underlying social network affects who benefits from whom. For example, a good displays local network effects when rather than being influenced by an increase in the size of a product's user base in general, each consumer is influenced directly by the decisions of only a typically small subset of other consumers, for instance those he or she is "connected" to via an underlying social or business network. Instant messaging is an example of a product that displays local network effects.
Additionally, there are two sources of economic value that are relevant when analyzing products that display network effects:
- Inherent value: I derive value from my use of the product
- Network value: I derive value from other people's use of the product
Read more about this topic: Network Effect
Famous quotes containing the words types of, types, network and/or effects:
“... there are two types of happiness and I have chosen that of the murderers. For I am happy. There was a time when I thought I had reached the limit of distress. Beyond that limit, there is a sterile and magnificent happiness.”
—Albert Camus (1913–1960)
“As for types like my own, obscurely motivated by the conviction that our existence was worthless if we didn’t make a turning point of it, we were assigned to the humanities, to poetry, philosophy, painting—the nursery games of humankind, which had to be left behind when the age of science began. The humanities would be called upon to choose a wallpaper for the crypt, as the end drew near.”
—Saul Bellow (b. 1915)
“Of what use, however, is a general certainty that an insect will not walk with his head hindmost, when what you need to know is the play of inward stimulus that sends him hither and thither in a network of possible paths?”
—George Eliot [Mary Ann (or Marian)
“Corporate America will likely be motivated to support child care when it can be shown to have positive effects on that which management is concerned about—recruitment, retention and productivity. Indeed, employers relate to child care as a way to provide growth fostering environments for young managers.”
—Dana E. Friedman (20th century)