When considering the benefits a product provides to you, does it matter to you whether many others also use that product? For many products, the answer is yes.
This simple idea that there are additional benefits to you if everyone else is using the same product is often called a network effect because as more people are ‘connected’ to the network, the benefits increase. More precisely, anytime there is a way that people are connected—whether it is a physical connection or not—the network effect is defined as the additional benefits to those connected to the network when the total number connected increases.
This policy brief discusses the importance of network effects in settings where the services provided are based on a platform, with a focus on electricity. We discuss several classic examples of network effects that are especially useful for clarifying how and when network effects benefit customers. These examples are used to discuss the potential analogy to the electricity context.