Question

Provide examples of businesses where network effects would or would not apply.

Answer 1

Network effect means a effect on business where value of goods or services gets improved or increased when the number of participant increases. Network effect is also known as demand side economies of scale or network externality. .

For example- telephone business , internet businesses such as amazon, flipkart , e-bay their value of goods and service gets improved as the number of participant in such businesses increases and number of users uses their services. In a telephone business when the number of users increases the value is increases to each other. The user purchases a phone for use of self but the value increases for each.

Another good example of network effect is uber because as the number of drivers gets increased then the market value of uber gets increased with the passengers seeking ride with uber.

Some of the social sites also gets benefitted of the network effect such as facebook, instagram and you tube. The value increases for facebook as the value increases as the numer of users increases.

For some businesses network effects applies but sometimes it works in reverse manner such as Linkedin and matrimonial websites uses network effects but these networks suffers from reverse network effects as new joiners may be having lower quality values such as fake profiles on linkedin and matrimonial sites.