Applying Economic Concepts 10-1
Network Effects as Entry Barriers
Digital technologies and social media have introduced many
products whose nature creates the potential for powerful entry
barriers that can help to sustain monopoly profits.
Network effects exist whenever the benefits that accrue to a
user of a specific product depend on how many other people or
firms use the product. An age-old example is the telephone; the
benefits you receive from using a telephone clearly depend on
how many other people use the same technology. Examples
from today’s digital world include Facebook, eBay, and
Microsoft Word. Consider each in turn.
The benefits of any one user of Facebook clearly increase as
the number of other users increases. The massive network of
users that Facebook has now established represents an
enormous entry barrier to any other business wishing to
compete for consumers’ attention or the placement of
advertising. This entry barrier helps to sustain Facebook’s high
profits.
Users of eBay benefit with an increase in the overall popularity
of this online auction service because more total users
increase the chance of completing a transaction. It is possible
for another business to create and launch a competing auction