Is this really a network effect?

Understand the idea

A network effect exists when a participant's value depends on the participation of others. Direct effects operate within a group; indirect effects can connect distinct groups such as buyers and sellers. Economies of scale instead concern how costs change with output. Growth may create both, neither, or a negative effect if congestion or low quality increases. [S28] Diagnose the mechanism before calling user growth a moat.

Worked example

For an invented campus marketplace, more relevant sellers may improve buyer choice, while more buyers attract sellers. Adding distant sellers who cannot deliver may create little local value. Separately, buying packaging in bulk reduces cost without necessarily making the marketplace more useful to existing buyers.

Where the idea stops

More participants do not guarantee winner-take-all outcomes. Relevance, geographic density, congestion, and the ease of using competing services can limit defensibility. [S28]

Connect it

Economics and technology: matching markets and feedback loops.

Go deeper

Why is total user count sometimes less informative than relevant local density?

Sources