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Basics

Applications intended for a community, such as collaborative hypertext applications, connect people by gathering them around the texts they produce, review, rate and remark on. The value that these connections create is a network effect. The simplest example of a system that exhibits network-effects is that of a phone network: If you were the only person in the world having a phone, it would be completely useless to you (except as a status-object). So why would anyone buy the first (few) phones? In the beginning of the 20th century this was a real issue, but as more people acquired phones, and thus could be called, having a phone became increasingly valuable. Similarly, Facebook probably is valuable to you because your friends are on there.

When discussing network effects, it is important to maintain a clear distinction between network effects and a few seemingly similar concepts. The first is that of something being mainstream and introduced to many people through word of mouth. You probably joined Facebook in response to a recommendation, but the same could be true for any other product, such as using scissors for cutting paper because you saw your mother do this. While obviously scissors don't have network-effects. Finally it is important to keep network effects separate from (production side) economics of scale. Mass-produced scissors may be cheaper, but there is again no effect of others using scissors on your cutting.

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avatar by: Anonymous ...

Slam duinkn like Shaquille O'Neal, if he wrote informative articles.

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