Editing Network effect (section)

==Adoption and competition==
{{More citations needed section|date=March 2018}}

=== Critical mass ===
In the early phases of a network technology, incentives to adopt the new technology are low. After a certain number of people have adopted the technology, network effects become significant enough that adoption becomes a [[Strategic dominance|dominant strategy]]. This point is called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service.<ref>{{Cite journal|last1=Grajek|first1=Michał|last2=Kretschmer|first2=Tobias|date=2012-11-01|title=Identifying critical mass in the global cellular telephony market|url=http://www.sciencedirect.com/science/article/pii/S016771871200077X|journal=International Journal of Industrial Organization|language=en|volume=30|issue=6|pages=496–507|doi=10.1016/j.ijindorg.2012.06.003|issn=0167-7187}}</ref>

When a product reaches critical mass, network effects will drive subsequent growth until a stable balance is reached.<ref>{{Cite journal|last1=Evans|first1=David S.|last2=Schmalensee|first2=Richard|date=2010-01-03|title=Failure to Launch: Critical Mass in Platform Businesses|url=https://www.degruyter.com/view/j/rne.2010.9.issue-4/rne.2010.9.4.1256/rne.2010.9.4.1256.xml|journal=Review of Network Economics|volume=9|issue=4|doi=10.2202/1446-9022.1256|hdl=1721.1/76685|s2cid=201056684|issn=1446-9022|hdl-access=free|access-date=2020-10-31|archive-date=2023-02-04|archive-url=https://web.archive.org/web/20230204153910/https://www.degruyter.com/document/doi/10.2202/1446-9022.1256/html|url-status=live}}</ref> Therefore, a key business concern must then be how to attract users prior to reaching critical mass. Critical quality is closely related to consumer expectations, which will be affected by price and quality of products or services, the company's reputation and the growth path of the network.<ref name=":2">{{Cite book |url=https://www.worldcat.org/oclc/1029103812|title=The new Palgrave dictionary of economics |editor-last=Jones |editor-first=Garett |isbn=978-1-349-95189-5|edition=Third|location=London|oclc=1029103812|access-date=2020-10-30|archive-date=2023-02-04|archive-url=https://web.archive.org/web/20230204153922/https://www.worldcat.org/title/1029103812|url-status=live}}</ref> Thus, one way is to rely on extrinsic motivation, such as a payment, a fee waiver, or a request for friends to sign up.<ref>{{Cite journal |last1=Sledgianowsk i|first1=Deb |last2=Kulviwat |first2=Songpol |date=2009-06-01 |title=Using Social Network Sites: The Effects of Playfulness, Critical Mass and Trust in a Hedonic Context |journal=The Journal of Computer Information Systems |volume=49 |issue=4 |pages=74–83 |doi=10.1080/08874417.2009.11645342 |s2cid=67868560 |issn=0887-4417 |eissn=2380-2057}}</ref> A more natural strategy is to build a system that has enough value ''without'' network effects, at least to [[early adopters]]. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base.<ref>{{Cite book |title=Trustworthy computing and services : International Conference, ISCTCS 2014, Beijing, China, November 28-29, 2014, Revised selected papers |date=19 June 2015 |editor=Lu, Yueming |editor2=Wu, Xu |editor3=Zhang, Xi |isbn=978-3-662-47401-3 |location=Heidelberg |oclc=911938121}}</ref>

===Limits to growth===

Network growth is generally not infinite, and tends to plateau when it reaches [[market saturation]] (all customers have already joined) or [[diminishing returns]] make acquisition of the last few customers too costly.

Networks can also stop growing or collapse if they do not have enough capacity to handle growth. For example, an overloaded phone network that has so many customers that it becomes congested, leading to [[busy signal]]s, the inability to get a [[dial tone]], and poor [[customer support]]. This creates a risk that customers will defect to a rival network because of the inadequate capacity of the existing system. After this point, each additional user decreases the value obtained by every other user.

[[Peer-to-peer]] (P2P) systems are networks designed to distribute load among their user pool. This theoretically allows P2P networks to scale indefinitely. The P2P based telephony service [[Skype]] benefits from this effect and its growth is limited primarily by market saturation.<ref>{{Cite journal|last1=Gunduz|first1=Gurhan|last2=Yuksel|first2=Murat|date=2016-05-08|title=Popularity-based scalable peer-to-peer topology growth|url=http://www.sciencedirect.com/science/article/pii/S1389128616300391|journal=Computer Networks|language=en|volume=100|pages=124–140|doi=10.1016/j.comnet.2016.02.017|issn=1389-1286}}</ref>

=== Market tipping ===
Network effects give rise to the potential outcome of market tipping, defined as "the tendency of one system to pull away from its rivals in popularity once it has gained an initial edge".<ref>{{Cite journal|last1=Katz|first1=Michael L.|last2=Shapiro|first2=Carl|date=June 1994|title=Systems Competition and Network Effects|url=https://www.aeaweb.org/articles?id=10.1257%2Fjep.8.2.93|journal=Journal of Economic Perspectives|language=en|volume=8|issue=2|pages=93–115|doi=10.1257/jep.8.2.93|issn=0895-3309|access-date=2023-02-04|archive-date=2022-12-05|archive-url=https://web.archive.org/web/20221205011224/https://www.aeaweb.org/articles?id=10.1257%2Fjep.8.2.93|url-status=live}}</ref> Tipping results in a market in which only one good or service dominates and competition is stifled, and can result in a [[monopoly]]. This is because network effects tend to incentivise users to coordinate their adoption of a single product. Therefore, tipping can result in a natural form of market concentration in markets that display network effects.<ref>{{Cite book|last=1. Shapiro 2. Varian|first=1. Carl 2. Hal|title=Information Rules|publisher=Harvard Business School Press|year=1998|location=Boston}}</ref> However, the presence of network effects does not necessarily imply that a market will tip; the following additional conditions must be met:

# The utility derived by users from network effects must exceed the utility they derive from differentiation
# Users must have high costs of [[multihoming]] (i.e. adopting more than one competing networks)
# Users must have high switching costs

If any of these three conditions are not satisfied, the market may fail to tip and multiple products with significant market shares may coexist.<ref name=":4" /> One such example is the U.S. instant messaging market, which remained an oligopoly despite significant network effects. This can be attributed to the low multi-homing and switching costs faced by users.

Market tipping does not imply permanent success in a given market. Competition can be reintroduced into the market due to shocks such as the development of new technologies. Additionally, if the price is raised above customers' willingness to pay, this may reverse market tipping.<ref name=":4" />

=== Multiple equilibria and expectations ===
Networks effects often result in multiple potential market equilibrium outcomes. The key determinant in which equilibrium will manifest are the expectations of the market participants, which are self-fulfilling.<ref name=":2" /> Because users are incentivised to coordinate their adoption, user will tend to adopt the product that they expect to draw the largest number of users. These expectations may be shaped by path dependence, such as a perceived [[first-mover advantage]], which can result in [[Vendor lock-in|lock-in]]. The most commonly cited example of path dependence is the [[QWERTY]] keyboard, which owes its ubiquity to its establishment of an early lead in the keyboard layout industry and high switching costs, rather than any inherent advantage over competitors. Other key influences of adoption expectations can be reputational (e.g. a firm that has previously produced high quality products may be favoured over a new firm).<ref>{{cite book |title=Contemporary Strategy Analysis  |first=Robert M. |last=Grant |year=2009 |publisher=John Wiley & Sons |isbn=978-0-470-74710-0}}</ref>

Markets with network effects may result in inefficient equilibrium outcomes. With simultaneous adoption, users may fail to coordinate towards a single agreed-upon product, resulting in splintering among different networks, or may coordinate to lock-in to a different product than the one that is best for them.<ref name=":2" />