Network Effect

In economics, a network effect exists when the value of a good or service increases as more people use that good or service.

The term “network effect” is defined by marketingterms.com as “the phenomenon whereby a service becomes more valuable as more people use it, thereby encouraging ever-increasing numbers of adopters.”

The telephone is frequently used as an example of the network effect. Phone service would not be very valuable to a single subscriber, but as more people own telephones, the more valuable the service becomes to each owner.

More current examples of the network effect are online social networks such as MySpace and Facebook. As the number of people who subscribe to these sites increases, the more useful the sites become to those who are members.

As networks become more popular, they inherently become more valuable to both the users and the owners of the service. As popularity increases, an additional network effect may occur called the "bandwagon effect," otherwise known as trends and fads.

Resources:

1. Exploring Network Economics by Michael J. Mauboussin, Legg Mason Capital Management
   
2. http://www.marketingterms.com/dictionary/network_effect/