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Network Effect: Market
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The literature has identified two types of network effects. Direct network effects have been defined as those generated through a direct physical effect of the number of purchasers on the value of a product (e.g. fax machines). Indirect network effects are "market mediated effects" such as cases where complementary goods (e.g. toner cartridges) are more readily available or lower in price as the number of users of a good (printers) increases. In early writing... this distinction was not carried into models of network effects.
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The network effect has a lot of similarities with the description of phenomenon in reinforcing positive feedback loops description of system dynamics (Sterman 2000). System dynamics could be used as a modeling method to describe such phenomenon such as word of mouth and Bass model of marketing.
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Panel data analysis of radio station listening and advertising sales confirms the two-sided nature of the market---the positive effect of listeners on advertising sales and the negative effect of advertising on listening. The data---on thirty markets over five years---... lend support to some of the model's findings on the effects of broadcasting quality and radio market competition on listener and advertiser behavior. Having an owner with more market power improves a radio station's performance in the listener market, but its effect in the advertising market is less transparent.
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TPMA's members benefit from being able to network with other Marketing, Sales, Finance, and Operations Executives across industries to share best practices and strategies in a non-competitive environment. For more information on TPMA, contact Mike Kantor, Managing Director at mkantor@tpcww.com, or visit www.tradepromo.org
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Harvey Liebenstein’s work on bandwagon and snob effects (1950) anticipates much of the argument regarding network effects. His main result is that demand curves are more elastic when consumers derive positive value from increases in the size of the market.
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