Network effect

In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that good or service to other people. When network effect is present, the value of a good or service increases as more people use it.

The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their telephone without intending to create value for other users, but does so in any case.

The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in network congestion).

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join in a positive feedback loop.