Question

What are network effects? What market power does a social network such as Facebook imply for a business that has a Facebook profile

Answer 1

The network effect is a phenomenon which occurs when a good or service becomes more valuable as more people use it.For a good with network effects, the difficulty is often getting established. Early users of social networking sites didn't have many people to interact with. But, as everyone joined a group like Facebook, it created an effect with people feeling the need to join.This effect is what we call as network effect.The rise of social media can be directly correlated to the network effect. The more users present on Facebook sharing comments, links, and media, the more useful the platform became to the public where the escalation of users encouraged interest from even more users.

Market Power is an extent to which a firm can influence the price of an item by exercising control over its demand, supply, or both. Facebook created a dominant position in social networking, in large part to network effects. A business with a facebook profile can use social networking such as Facebook for increasing brand recognition and loyalty. Building a profile provides access to and interaction with new, recent and old customers. Sharing blog posts, images, videos or comments on social media allows followers to react, visit the company’s website and become customers.
Because it makes the company more accessible to new customers and more recognizable for existing customers, it helps in promoting a brand’s voice and content thus establishing the market power of the business's goods and services.