Diagram showing the network effect in a few simple phone networks. The lines represent potential calls between phones. The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop. Origins Network effects were a central theme in the arguments of Theodore Vail, the first post patent president of Bell Telephone, in gaining a monopoly on US telephone services. The economic theory of the network effect was advanced significantly between 1985 and 1995 by researchers Michael L. Benefits Network effects become significant after a certain subscription percentage has been achieved, called critical mass. Technology lifecycle Lock-in
Related: Web & economy
SNAPSHOT: Here's (Almost) Everybody That Works At FoursquareYahoo! economist rebuilds ad empire with 'Magic Formula'Yahoo! CEO Carol Bartz owns a sweatshirt emblazoned with Preston McAfee's math. McAfee is an economist, but he's the sort of economist who's actually useful. In the early-90s, he helped build the simultaneous ascending auction, a mathematical contraption that governments across the globe have since used to license over $100 million in wireless spectrum. And nowadays, as the man who oversees the microeconomics and social sciences research group at Yahoo! "I'm a member of a group of people — you might even call it a movement — who do economics as an engineering discipline," McAfee tells The Reg. "Economics as engineering discipline is all about building things with economics that are positive — as opposed to stopping things, things that won't work." McAfee is a disciple of Nobel Prize–winning economist Roger Myerson, whose "mechanism design theory" has been used to build everything from efficient trading systems to reliable voting procedures. The formula Yes, Yahoo!
Economists the new hot job category for Silicon Valley tech companiesBy Mike Swift email@example.com Posted: 11/22/2010 12:01:00 AM PST0 Comments|Updated: 3 years ago In addition to software engineers, computer scientists and Web designers, Silicon Valley giants ranging from Yahoo to Google to eBay are scrambling to hire economists, little-known and increasingly valuable weapons as these companies create new businesses and fine-tune existing ones. In the wake of the example of UC Berkeley economist Hal Varian, who helped Google perfect the auction process behind its multibillion-dollar search advertising revenue stream, big Internet companies are competing to woo economists away from universities or work with them on specific projects. "Other companies have recognized that economists really have a lot to contribute," said Varian, who joined Mountain View-based Google full time in 2007 after having worked as a consultant for the search giant since 2002.
Towards a Value-Added User Data EconomyEvery week it seems like the debate over access to, portability of and privacy over user data on the social web has reached new heights. It's only going to get louder though, just as discussions about other forms of economics will never be resolved. That's a part of what's going on, economics. This is an information economy, after all, and user data is clearly one of the most important currencies in circulation. User data has been sold by ISPs, leveraged by ad networks and horded by social networks for years. Now, users are storming the castle to recapture their own booty. The Importance of Privacy Facebook holds a growing amount of user data and tries to hold on to it tightly in the name of user privacy. High profile blogger Robert Scoble teamed up with spamtastic startup Plaxo to scrape the emails from his contacts' profiles in Facebook, turn them from protected images into machine readable text with OCR technology and then export them outside of Facebook. Long Term Interests Good Faith
Strategies for Two-Sided MarketsThe Idea in Brief If you listed the blockbuster offerings that have redefined the global business landscape, you’d find that many tie together two distinct groups of users. HMOs, for instance, link patients to health-care providers. When successful, these platforms catalyze a virtuous cycle: More demand from one user group spurs more from the other. But as Eisenmann, Parker, and Van Alstyne contend, managing platforms is tricky: Strategies that make traditional offerings successful won’t work in these two-sided markets. The key challenge? If you seize a platform opportunity but don’t get it right the first time, someone else will. The Idea in Practice To ensure your platform’s success: Get Pricing Right Consider these pricing strategies: Subsidize quality- and price-sensitive users. Cope with Winner-Take-All Competition The prospect of fat margins in two-sided markets can fuel an intense desire among rivals to become the only platform provider. Want to fight for proprietary control? Example: