What are the different ways in which network effects break down? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Abhinav Sharma, Product Designer, on Quora:

There are a few important ways in which network effects break down that I want to call out. First, negative network effects, or things that get worse in the network with each additional member. This is the less talked about network effect. A good example is found in cities. More people move to cities to take advantage of opportunities they afford, but this also leads to problems, like road traffic congestion or air quality, and sometimes the costs tip over to exceed the benefits. There are other negative network effects, e.g. context collapse in social networks i.e. with the growth of the Facebook social network, it became more likely that people's parents joined in, leading to people becoming less willing to share on Facebook. Strategically, Facebook mitigated this decline in original content sharing by porting its network to Messenger as private sharing started to dominate.

Second, you can reduce the cost of collective action. I have another cities example here. Let's say a city came up because of geographical advantages in maritime shipping, but that is no longer important. Ships have grown in size, become less important to overall power and the environment has changed. Nevertheless, old cities of power remain important because of the network effects they established. Now, say you want to leave your city (maybe because of a negative network effect) but your city is vitally important to you but you can't leave it because you're too attached to your network there. If everyone agreed to move, it'd be great for everyone but a few people leaving would leave them worse off. But everyone else feels the same way too. Now imagine you could all sign a contract that you'd leave for a new city if everyone else leaves, and this contract is strongly enforced and binding. One example of this that I like is Kickstarter, where new products are able to get the funding to overcome incumbents (economies of scale are a special case of network effects). This works because many people can promise funding on Kickstarter but the transaction only goes through if a threshold is reached.

Third, the network has a central point of failure that we either don't identify quick enough and fail to build redundancy for, some examples:

  • The decline of the auto industry and Detroit.
  • Ghost towns that originally formed around a central limited resource like gold or oil.
  • Organizations that relied too heavily upon their leaders and didn't develop processes and a culture to stay sustainable afterwards.

And finally, you can decentralize power in the network. This doesn't actually break down the network and often makes it stronger. But often in practice, we think of network effects as a bad thing if they're causing a centralization of power in non-benevolent hands. In these cases, decentralization of power makes the network more robust. Examples of this are phone number portability (breaking the lock-in with your phone provider) and this is an idealistic promise of cryptocurrency as well. In this case, the network doesn't break down but the average actor receives more of the benefit.

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Published on: Jan 24, 2018