Network Effect as a Competitive Edge: What Have We Learnt From the Literature?

Abstract

Network effect is defined as the value that an additional user of a product has on that product’s value to others. In an industry exhibiting network effect, firms need to consider the possible role of the network being the establishment of a competitive edge. In this review, our goal is to synthesize the broad literature on network effects, and we put forward the argument that, in practice, network effect has quietly become a key factor in forming a firm’s competing strategy. In the presence of positive network effects, consumers’ willingness to pay is an increasing function of the network size.