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Definition: Network Effect
In network effect goods and services become more valuable as they are used by more and more people over the time. It occurs when there is a growing demand for products (or a service) due to its increase in importance in the market. Thus there is an increase in its value which is known as Network effect.
This effect is best illustrated through the example of Telephone. If there was only one telephone in the entire world, then it won’t be of any use. But if many people are connected to each other, then it becomes more useful.