Network externalities refers to a situation where the
consumption and demand of a product is interdependent with some
other persons.the consumption and demand increases and decreases
with respect to other persons consumption.
Main characteristics -the network externalities can be
elaborated and classified in two terms-
- positive
network externality(bandwagon effect)
- negative
network externality(Snob effect)
positive network externality(bandwagon
effect)-
- positive network externality implies that when a
person consume any good and service and people get encourage to
consume the same thing.therefore the demand of the goods and
services increases whether the seller decrease or may not decrease
the price.but in other industry,generally ,the demand of the
product can be increased when a seller decreases the
price.
- positive network externality is also known as bandwagon
effect,it can be illustrated as below-
- suppose A has purchased a computer for sending Email to his
friend B.therefore A purchased computer and availed the internet
facility.B will also has to buy computer and avail internet service
to receive email.the neighbor B also got encouraged and he too
purchased the computer and availed the internet service.in the
above example we can see by the demonstration effect the people are
increasing there consumption by seeing each other and
firm is
experiencing the maximum profit and able to sell additional unit of
commodity and services without declining the price which is a major
difference compare to the ordinary firm demand
concept.
negative network externality(Snob effect)-
- sometimes when demand of a particular/unique thing increases
then it would lead to decrease the value of goods to posses
them.therefore this creates a negative externalities.
- the firm has not increased the price of the product but
still the demand of the cars have been declined due to
increase in the level of business which is a also another major
difference compare to the ordinary firm demand concept.this
is known as SNOB EFFECT
- illustration-suppose the demand for luxurious car
has increased and therefore, people who were ready to buy the
product due to the uniqueness and considered as a status symbol
won't buy it anymore, because earlier only a few person were able
to buy it and therefore the car possessed greater value but now it
can be purchased by anyone therefore there would be a bend in the
demand curve.