Network Economics Applies the Law of Diminishing Returns to Communities of Users

The network effect is a phenomenon in which more people or participants improve the value of a good or service. The Internet is an example of the network effect. At first, there were few users on the Internet, as it had little value to anyone outside the military and some researchers. The law of diminishing returns is an economic principle that states that if investment in a particular area increases, the rate of profit of that investment cannot continue to rise after a certain point in time if other variables remain constant. If investments continue beyond this point, the return gradually decreases. Mirabilis is an Israeli start-up pioneer in instant messaging (IM) and acquired by America Online. By giving away their ICQ product for free and preventing interoperability between their client software and other products, they were able to temporarily dominate the instant messaging market. Instant messaging technology has completed home-to-work deployment due to its faster processing speed and streamlined process features. Due to the network effect, new IM users gained much more value by choosing the Mirabilis system (and joining its vast network of users) than a competing system. As was typical at the time, the company never attempted to take advantage of its dominant position prior to the sale of the business.

[37] A) applies the law of revenue reduction to user communities. The network effect has also played a role in the proliferation of carpooling. Companies like Uber and Lyft have grown and grown with the support of participants who signed up and expanded their reach in cities and states. As more drivers became part of Uber and Lyft, both brands gained market value. Google uses the network effect in its advertising activity with its Google AdSense service. AdSense places ads on many smaller sites, such as blogs, using Google technology to determine which ads are relevant to which blogs. Therefore, the service appears to aim to serve as an exchange (or ad network) to match many advertisers with many small websites. In general, the more blogs AdSense can reach, the more advertisers it attracts, making it the most attractive option for more blogs. In addition, negative network externalities have four characteristics: more connection attempts, longer request times, longer download times, and more download attempts. [27] Therefore, congestion occurs when the efficiency of a network decreases as more and more people use it, reducing value for those who are already using it. Traffic congestion that congestes the highway and network congestion on limited bandwidth connections both have negative externalities on the network.

[28] Negative network externalities in the mathematical sense are those that have a negative effect compared to normal (positive) network effects. Just as positive network externalities (network effects) cause positive feedbacks and exponential growth, negative network externalities generate negative feedbacks and exponential degradation. In nature, negative network externalities are the forces that pull toward equilibrium, are responsible for stability, and represent physical constraints that limit systems. When it comes to sustainability, the network economy refers to several professionals (architects, designers or related companies) all working together to develop sustainable products and technologies. The more companies are involved in environmentally friendly production, the easier and cheaper it becomes to produce new sustainable products. [16] For example, if no one makes sustainable products, it is difficult and expensive to design a sustainable home using bespoke materials and technologies. However, due to the network economy, the more industries involved in the production of these products, the easier it is to design an environmentally sustainable building. In communication and information technology, open standards and interfaces are often developed through the participation of several companies and are generally perceived as mutually beneficial. In cases where the relevant communication protocols or interfaces are closed standards, the network effect can give monopoly power to the company that controls these standards.

The Microsoft Group is widely regarded by IT professionals as maintaining its monopoly in this way. One observed method that Microsoft uses to use the network effect to its advantage is called Embrace, extend and extinguish. [36] Network effects can be found on social media. For example, the more content users post such as links and media on Twitter, the more useful the platform becomes to the audience. The network effect has created exponential growth rates for networking platforms such as Facebook, YouTube, and Instagram. B) applies the traditional economy to connected users. The network effects that exist on the internet often benefit a variety of applications and websites. As more and more professionals offer their services online, such as dog walkers, tutors or electricians, more and more customers rely on these online directories. Ecommerce sites like Etsy and eBay became increasingly popular as more sellers joined these marketplaces and sold their products to consumers who accepted online purchases. Suppliers of goods and services must ensure that capacity can be increased sufficiently to meet the needs of all users, which can be costly. Network effects are often confused with economies of scale, which describe the decrease in average production costs relative to the total volume of units produced. Economies of scale are a common phenomenon in traditional industries such as manufacturing, while network effects are more prevalent in new economy industries, particularly in information and communication technologies.

Network effects are the counterpart of demand-side economies of scale, as they increase a customer`s willingness to pay rather than reducing the average cost of the supplier. [5] In 2007, Apple released the iPhone, followed by the App Store. Most iPhone apps rely heavily on the presence of strong network effects. This allows the software to gain popularity very quickly and spread to a wide user base with very limited marketing needs. The freemium business model has evolved to take advantage of these network effects by releasing a free version that doesn`t limit adoption or users, and then charging for premium features as the primary revenue stream. In addition, some software companies will launch free trials during the trial period to attract buyers and reduce their uncertainty.