MGCR 331 Chapter 6: notes Chapter 6- network effect.docx

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Network effects: also known as metcalfe"s law, or network externalities. When the value of a product or service increases as its number of users expands. The value derived from network effects comes from three sources: exchange, staying power, and complementary benefits. Exchange: every product or service subject to network effects fosters some kind of exchange. Ex: facebook (alone on facebook sucks, good if there are a lot of people to exchange with). Staying power: the long-term viability of a product or service. Related to switching cost. (the most a user invests in learning, buying and installing a product the less he"d like to change. ) Complementary benefits: products or services that add additional value to the primary product or service that makes up a network. (it can be the how-to books etc) Platforms: products and services that allow for the development and integration of software products and other complementary goods.

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