Network Externalities

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Definition
Background
Detailed Explanations
Real Application in the Market
1. Positive Feedback
2. Negative Point
5.
6.
Future Expansion
Reference
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Network Externality
◦ The benefit from using a good increases with the number of
other users of the same good
◦ The value created by the size of its installed base and the
availability of complementary goods
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Installed base
◦ The number of users of a particular good
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Complementary goods
◦ Additional goods and services that enable or enhance the value
of another good
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The concept of Network Externality was initially introduced
to just explain the growth of electronic space.
But, as electronic space becomes one of the space of
economic activity, network externality is most important
theory of new coming economic phenomenon.
The concept of network externality, which is
introduced to understand ‘Informationization’ by
network revolution, was understood as the most
important concept explains new coming network
economy.
1.
2.
3.
4.
Definition
Background
Detailed Explanations
Real Application in the Market
1. Positive Feedback
2. Negative Point
5.
6.
Future Expansion
Reference
Classic Example: Telephone
Little Value
Positive Effect
•For product or service: more
users, more value
•Telephone, etc
Some Value
Huge Value
Negative Effect
•For product or service: more
users, less value = Congestion
•Traffic, etc
Network Effect gives two type of advantages….
Direct
•Immediate Result of other users adopting the same
system
•Examples: Fax, email,…
Indirect
•Secondary result of many people using same system
•Examples: Cheaper toners, OS system competition…
•Key point is how to attract customers
•Critical Mass plays pivotal role for establish early success
•However, saturation occurs sooner later P2P Occurs.
Negative Effect of Network Externality
Lock in Effect
•Network Externality can result in lock-in effect
•Makes a customer dependent on a vendor for products and services
•Unable to use another vendor without substantial switching costs
Resource Limit can occur
•After Saturation, n+1 person start to decrease the network value
•Exclusion value exists for some networks..
Provider Complacency
•No viable competitor exists for certain network providers..
•Restrict resource, fee increase…
1.
2.
3.
4.
Definition
Background
Detailed Explanations
Real Application in the Market
1. Positive Feedback
2. Negative Point
5.
6.
Future Expansion
Reference

Language (that is, English)
リンゴ
Eple
사과
‫تفاحة‬
Яблоко
Jabłko
Apple
苹果
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Compatibility
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Windows(OS) and other applications
competition between Beta and VHS
Credit card
Online service (Internet auction)
Fax machine (fac-simile)
Telephone network
Railroad
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Product and its complement
◦ Camera and its lenz
◦ Software and hardware

Example in Naver
◦ exclusive in internet portal market
1.
2.
3.
4.
Definition
Background
Detailed Explanations
Real Application in the Market
1. Positive Feedback
2. Negative Point
5.
6.
Future Expansion
Reference




http://www.emh.co.kr/xhtml/network_extern
alities.html
http://mbastory.tistory.com/133
http://www.econ.yale.edu/alumni/reunion99
/besen.htm
http://www.kebic.or.kr/electronPrivate/main/
display.asp?idx=449&g=1
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