Editing Network effect (section)

==Examples==

=== Telephone ===
Network effects are the incremental benefit gained by each user for each new user that joins a network.<ref>{{Cite web|date=2018-02-15|title=What are Network Effects? Indirect and Direct Network Effects|url=https://www.applicoinc.com/blog/network-effects/|access-date=2021-04-24|website=Applico {{!}} Platform Experts|language=en|archive-date=2021-04-28|archive-url=https://web.archive.org/web/20210428195835/https://www.applicoinc.com/blog/network-effects/|url-status=live}}</ref> An example of a direct network effect is the [[telephone]]. Originally when only a small number of people owned a telephone the value it provided was minimal. Not only did other people need to own a telephone for it to be useful, but it also had to be connected to the network through the users home. As technology advanced it became more affordable for people to own a telephone. This created more value and utility due to the increase in users. Eventually increased usage through exponential growth led to the telephone is used by almost every household adding more value to the network for all users. Without the network effect and technological advances the telephone would have nowhere near the amount of value or utility as it does today.

===Financial exchanges===
Transactions in the financial field may feature a network effect.  As the number of sellers and buyers in the exchange, who have the symmetric information increases, liquidity increases, and transaction costs decrease.<ref>{{Cite journal|last1=Nel|first1=George F.|last2=Smit|first2=Eon|last3=Brummer|first3=Leon M.|date=2018-04-12|title=The link between Internet investor relations and information asymmetry|url=https://sajems.org/index.php/sajems/article/view/1966|journal=South African Journal of Economic and Management Sciences|volume=21|issue=1|doi=10.4102/sajems.v21i1.1966|issn=2222-3436|doi-access=free|access-date=2020-10-31|archive-date=2020-11-07|archive-url=https://web.archive.org/web/20201107041204/https://sajems.org/index.php/sajems/article/view/1966|url-status=live|hdl=2263/66593|hdl-access=free}}</ref>{{failed verification|date=February 2024|reason=See [https://en.wikipedia.org/w/index.php?title=Network_effect&diff=1201938342&oldid=1193499676]}} This then attracts a larger number of buyers and sellers to the exchange.

The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. For example, the [[Chicago Board of Trade]] has retained overwhelming dominance of trading in [[US Treasury bond]] futures despite the startup of [[Eurex]] US trading of identical futures contracts. Similarly, the [[Chicago Mercantile Exchange]] has maintained dominance in trading of Eurobond interest rate futures despite a challenge from [[Euronext.Liffe]].

=== Cryptocurrencies and blockchains ===
[[Cryptocurrency|Cryptocurrencies]] such as [[Bitcoin]] and smart contract blockchains such as [[Ethereum]] also exhibit network effects.

[[Smart contract]] blockchains can produce network effects through the social network of individuals that uses a [[blockchain]] for securing its transactions. Public infrastructure networks such as [[Ethereum]] and others can facilitate entities that do not explicitly trust one another to collaborate in meaningful way, incentivizing growth in the network. However, as of 2019, such networks grow more slowly due to missing particular requirements such as [[Privacy concerns with social networking services|privacy]] and [[scalability]].<ref name=ssrn20190209>{{cite journal |title=Blockchain Valuation: Internet of Value, Digital Networks and Smart Transactions |last=Moro Visconti|first=Roberto |website=SSRN |date=9 February 2019 |doi=10.2139/ssrn.3533860 |s2cid=219348292 |access-date=26 May 2023 |url=http://dx.doi.org/10.2139/ssrn.3533860 }}</ref>

===Software===
The widely used computer [[software]] benefits from powerful network effects. The software-purchase characteristic is that it is easily influenced by the opinions of others, so the customer base of the software is the key to realizing a positive network effect. Although customers' motivation for choosing software is related to the product itself, media interaction and word-of-mouth recommendations from purchased customers can still increase the possibility of software being applied to other customers who have not purchased it, thereby resulting in network effects.<ref>{{Cite book|last=Kemper, Andreas.|url=https://www.worldcat.org/oclc/697300408|title=Valuation of network effects in software markets : a complex networks approach|date=2010|publisher=Physica|isbn=978-3-7908-2367-7|location=Heidelberg|oclc=697300408}}</ref>

In 2007 [[Apple Inc.|Apple]] released the [[iPhone]] followed by the [[App Store (iOS)|app store]]. Most iPhone apps rely heavily on the existence of strong network effects. This enables the software to grow in popularity very quickly and spread to a large userbase with very limited marketing needed. The [[Freemium]] business model has evolved to take advantage of these network effects by releasing a free version that will not limit the adoption or any users and then charge for premium features as the primary source of revenue. Furthermore, some software companies will launch free trial versions during the trial period to attract buyers and reduce their uncertainty. The duration of free time is related to the network effect. The more positive feedback the company received, the shorter the free trial time will be.<ref>{{Cite journal|last1=Cheng|first1=Hsing Kenneth|last2=Liu|first2=Yipeng|date=2012|title=Optimal Software Free Trial Strategy: The Impact of Network Externalities and Consumer Uncertainty|url=https://www.jstor.org/stable/23274435|journal=Information Systems Research|volume=23|issue=2|pages=488–504|doi=10.1287/isre.1110.0348|jstor=23274435|issn=1047-7047|access-date=2020-10-31|archive-date=2020-11-04|archive-url=https://web.archive.org/web/20201104175229/https://www.jstor.org/stable/23274435|url-status=live}}</ref>

Software companies (for example [[Adobe Inc.|Adobe]] or [[Autodesk]]) often give significant discounts to students.<ref>{{cite web |title=Educational access to Autodesk products |url=https://www.autodesk.com/education/edu-software/overview?sorting=featured&filters=individual |access-date=4 April 2022 |website=Autodesk.com |archive-date=5 April 2022 |archive-url=https://web.archive.org/web/20220405020217/https://www.autodesk.com/education/edu-software/overview?sorting=featured&filters=individual |url-status=live }}</ref> By doing so, they intentionally stimulate the network effect - as more students learn to use a particular piece of software, it becomes more viable for companies and employers to use it as well. And the more employers require a given skill, the higher the benefit that employees will receive from learning it. This creates a self-reinforcing cycle, further strengthening the network effect.

===Web sites===
Many [[web site]]s benefit from a network effect. One example is web marketplaces and exchanges. For example, [[eBay]] would not be a particularly useful site if [[auction]]s were not competitive. As the number of users grows on eBay, auctions grow more competitive, pushing up the prices of bids on items. This makes it more worthwhile to sell on eBay and brings more sellers onto eBay, which, in turn, drives prices down again due to increased supply. Increased supply brings even more buyers to eBay. Essentially, as the number of users of eBay grows, prices fall and supply increases, and more and more people find the site to be useful.

Network effects were used as justification in [[business model]]s by some of the [[dot-com company|dot-com companies]] in the late 1990s. These firms operated under the belief that when a new [[Market (economics)|market]] comes into being which contains strong network effects, firms should care more about growing their [[market share]] than about becoming [[Profit (accounting)|profitable]]. The justification was that market share would determine which firm could set technical and marketing standards and giving these companies a [[first-mover advantage]].<ref name="Jones, Garett">{{Cite book |title=The new Palgrave dictionary of economics |author=Jones, Garett |isbn=978-1-349-95189-5 |edition=Third |location=London |oclc=1029103812}}</ref>

[[Social networking]] websites are good examples. The more people register onto a social networking website, the more useful the website is to its registrants.<ref>{{cite journal|last=Belvaux|first=Bertrand|title=The Development of Social Media: Proposal for a Diffusion Model Incorporating Network Externalities in a Competitive Environment|journal=Recherche et Applications en Marketing - English Version|year=2011|volume=26|issue=3|pages=7–22|doi=10.1177/205157071102600301|s2cid=168202506}}</ref>

Google uses the network effect in its advertising business with its [[Google AdSense]] service. AdSense places ads on many small sites, such as [[blog]]s, using Google technology to determine which ads are relevant to which blogs.  Thus, the service appears to aim to serve as an exchange (or ad network) for matching many advertisers with many small sites. In general, the more blogs AdSense can reach, the more advertisers it will attract, making it the most attractive option for more blogs.

By contrast, the value of a news site is primarily proportional to the quality of the articles, not to the number of other people using the site.  Similarly, the first generation of [[search engine]]s experienced little network effect, as the value of the site was based on the value of the search results. This allowed [[Google]] to win users away from [[Yahoo!]] without much trouble, once users believed that Google's search results were superior.  Some commentators mistook the value of the Yahoo! brand (which does increase as more people know of it) for a network effect protecting its advertising business.

===Rail gauge===
[[File:Rail gauge world.svg|thumb|350px|The dominant rail gauge in each country shown]]
There are strong network effects in the initial choice of [[rail gauge]], and in [[gauge conversion]] decisions. Even when placing isolated rails not connected to any other lines, track layers usually choose a standard rail gauge so they can use off-the-shelf rolling stock. Although a few manufacturers make rolling stock that can adjust to different rail gauges, most manufacturers make rolling stock that only works with one of the standard rail gauges. This even applies to [[urban rail]] systems where historically [[tram]]ways and to a lesser extent metros would come in a wide array of different gauges, nowadays virtually all new networks are built to a handful of gauges and overwhelmingly [[standard gauge]].

=== Credit cards ===
For [[credit card]]s that are now widely used, large-scale applications on the market are closely related to network effects. Credit card, as one of the currency payment methods in the current economy,<ref>{{Cite book|last=Shy, Oz |title=The economics of network industries s|date=2001 |publisher=Cambridge University Press |isbn=0-511-03224-2 |location=Cambridge, U.K. |oclc=559215717}}</ref> which was originated in 1949. Early research on the circulation of credit cards at the retail level found that credit card [[interest rate]]s were not affected by macroeconomic interest rates and remained almost unchanged. Later, credit cards gradually entered the network level due to changes in policy priorities and became a popular trend in payment in the 1980s.<ref name="Jones, Garett"/> Different levels of credit cards separate benefit from two types of network effects. The application of credit cards related to external network effects, which is because when this has become a payment method, and more people use credit cards. Each additional person uses the same credit card, the value of rest people who use the credit card will increase.<ref name=":1">{{Cite web|title=Unit 21 Innovation, information, and the networked economy|url=http://www.core-econ.org/the-economy/book/text/21.html|access-date=2020-10-30|website=core-econ.org|language=en|archive-date=2020-10-30|archive-url=https://web.archive.org/web/20201030105611/https://core-econ.org/the-economy/book/text/21.html|url-status=live}}</ref> Besides, the credit card system at the network level could be seen as a [[two-sided market]]. On the one hand, the number of cardholders attracts merchants to use credit cards as a payment method. On the other hand, an increasing number of merchants can also attract more new cardholders. In other words, the use of credit cards has increased significantly among merchants which leads to increased value. This can conversely increase the cardholder's credit card value and the number of users. Moreover, credit card services also display a network effect between merchant discounts and credit accessibility. When credit accessibility increases which greater sales can be obtained, merchants are willing to be charged more discounts by credit card issuers.<ref>{{Cite journal|last1=Chakravorti|first1=Sujit|last2=To|first2=Ted|date=2007-06-01|title=A theory of credit cards|url=http://www.sciencedirect.com/science/article/pii/S0167718706000890|journal=International Journal of Industrial Organization|language=en|volume=25|issue=3|pages=583–595|doi=10.1016/j.ijindorg.2006.06.005|issn=0167-7187}}</ref>

[[Visa Inc.|Visa]] has become a leader in the electronic payment industry through the network effect of credit cards as its competitive advantage. Till 2016, Visa's credit card [[market share]] has risen from a quarter to as much as half in four years. Visa benefits from the network effect. Since every additional Visa cardholder is more attractive to merchants, and merchants can also attract more new cardholders through the brand. In other words, the popularity and convenience of Visa in the electronic payment market, lead more people and merchants choose to use Visa, which greatly increases the value of Visa.<ref>{{Cite web|title=How Visa Created a Network Effect|url=https://marketrealist.com/2017/06/visa-creates-network-effect/|access-date=2020-10-30|website=Market Realist|date=15 June 2017|language=en|archive-date=2020-11-02|archive-url=https://web.archive.org/web/20201102035128/https://marketrealist.com/2017/06/visa-creates-network-effect/|url-status=live}}</ref>