Network Effects
The phenomenon whereby a product or service becomes more valuable to each user as more people use it.
What is Network Effects?
Network effects (or network externalities) exist when each new user of a product or platform adds value to all existing users, creating a self-reinforcing growth dynamic. Direct network effects occur when users benefit directly from others joining the same network (e.g., a messaging app). Indirect network effects arise when a larger user base attracts complementary products, raising value for all sides (e.g., more app developers join a phone OS because more consumers use it). Strong network effects create durable competitive moats because late entrants must convince users to leave a platform they already find valuable. They are a primary driver of winner-take-all or winner-take-most market dynamics in digital industries.
Example
Visa and Mastercard benefit from indirect network effects: more cardholders encourage merchants to accept their cards, which in turn makes the cards more attractive to consumers. With billions of cardholders and tens of millions of merchant acceptance points, the switching cost for either side is enormous.
Source: Investopedia — Network Effect