Construct · 1 fields · 3 citations

network externality: a standalone construct

One name. One construct. A landmark on the map.

● anchor · a standalone construct Nearest construct by meaningcritical masscompare the meanings
How to read this

Every construct on the map is compared with every other by the meaning of its definitions, and the closest one is surfaced here. The nearest construct to network externality is critical mass.

Hold this as a prompt, not a verdict. Two constructs sitting close in meaning is a reason to read them side by side and decide for yourself whether they are one idea under two names. It is not proof that they are. Compare the meanings in the Collider.

networkexternality1 CONSTRUCTNetwork externalityROHLFS · NETWORK EFFECT

A single standalone construct; nearby constructs are located against it in the Collider. Tap a field for its definition, unit, and measures.

Economics

A good's value to each user rises as the number of other users grows

Jeffrey Rohlfs introduced the idea in 1974, showing that the value of a communications service to any one subscriber rises as more people join it, so demand across buyers is interdependent rather than independent. Michael Katz and Carl Shapiro formalised the concept in 1985 as the network externality: the property that a product or service becomes more valuable to each user as the total number of users grows, whether directly (more people to call or message) or indirectly (more complementary goods, such as software written for a widely used operating system). Later work by Stan Liebowitz and Stephen Margolis in 1994 drew a further distinction, reserving network externality for the case where this benefit is not fully paid for or internalised by market participants and using network effect for the broader value increase, which is why the two terms are often treated as near-synonyms in practice. The construct is a landmark in industrial organisation and technology strategy because it explains why markets with strong user interdependence can tip toward a single standard or platform, how compatibility and standardisation choices shape competition, and why an installed base of existing users can matter as much as price or intrinsic quality.[1][2][3]

Unit
A property of a good or network: the marginal value to a user as a function of the size of the user base
Recovery means
Not applicable
Measured by
Identified in demand and adoption data as positive dependence of a user's valuation or adoption decision on installed base or user count, estimated with demand systems, hedonic and adoption models, and natural experiments in installed base

Next

Run it through the Collider, or take the citations with you.

See how network externality sits against neighbouring constructs in the Collider, or export every reference on this page in one click.

Open in ColliderExport BibTeXReport this entry

Nearby constructs

network4 fields · 6 citationsjingle · one word, four constructsexternality3 fields · 5 citationsjingle · one word, three constructsadoption3 fields · 5 citationsjingle · one word, three constructs

References

  1. Rohlfs, J. (1974). A theory of interdependent demand for a communications service. The Bell Journal of Economics and Management Science, 5(1), 16–37. https://doi.org/10.2307/3003090
  2. Katz, M. L., & Shapiro, C. (1985). Network externalities, competition, and compatibility. The American Economic Review, 75(3), 424–440.
  3. Liebowitz, S. J., & Margolis, S. E. (1994). Network externality: An uncommon tragedy. Journal of Economic Perspectives, 8(2), 133–150. https://doi.org/10.1257/jep.8.2.133

Cited on this page?

Confirm your construct, or correct us.

If your work is cited behind one of these entries, you know better than we do whether we captured the meaning right. Confirm it, suggest an edit, or dispute it, and your name goes on the entry as an author who has checked it, linked to your ORCID.

Claim your construct