Living Reference Work Entry

The Palgrave Encyclopedia of Strategic Management

pp 1-5

Date: Latest Version

Network Effects

  • Andrei HagiuAffiliated withHarvard Business School Email author 
  • , David B. Yoffie

Abstract

Network effects are a key economic and strategic phenomenon in ‘new economy’ industries. They can, but do not necessarily, lead to market tipping, unless they outweigh customers’ benefits from differentiation and are accompanied by high switching and multi-homing costs. Network effects create the possibility for multiple equilibrium market configurations, which are crucially determined by market participants’ expectations. While in some markets network effects are exogenously given, in other markets their existence and magnitude is endogenously determined by firms’ strategic choices.