Network Effect Essay

While all goods have a general purpose of satisfying the wants and needs of people, specific types of goods hold specialized places within the market and have various unique components. Network goods are one of these. The value of a network good increases when more consumers purchase and use them. This is obvious when noting the definition of network, being a connecting system.

The network effect is what creates the aspects of a network good. The network effect refers to the fact that the more people use something, the more value it has. There are four main types of network effects: direct, indirect, two-sided and local. Direct network effect is simply defined as increased use means increased value. Indirect network effects refers to complementary goods, stating that the increased use of a good results in the increased production and sales of its complements. An example of this would be a Windows personal computer indirectly spurring the creation and demand for computer security systems such as Norton. Also, in many cases, the price of complementary goods also decrease in these situations. Two-sided network effects refers to an increase in a network good’s use and in turn, the increase of sales of a similar substitute. Finally, local network effects display that when a good is used by an individual’s local group instead of customer base overall, sales and usage increase. Overall, the theory of network goods is relatively new for it applies to technological advances and companies more than any other market.

Network goods are commonly sold by monopolies, or the controller of a specific market. The reason for this is because new companies in a specific network industry have difficulty, for they start with no network at all. This a...

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...iest example of these goods would be the telephone, however, many goods since would be classified as a network good for they undergo network effects within the market. In these situations, the value of goods and services increases when more people use them. In the technological age, these networks are everywhere. However, the network effect and its model includes just as many negative implications as positive ones. Just like any theory or effect in economics, one must be sure not to let models and ideas lead them to conclusions. All markets, firms and connections are different. However, the similarities between items which undergo the network effect are quite evident. The most important distinction to take away is the difference between network effects and network externalities. There are many factors which constrict network goods and their position in the market.