The Network Effects of Large Tech Companies
This article details how large tech companies such as eBay, Netflix, Apple, Facebook, Google, Amazon, Microsoft etc. leverage network effects to their advantage. While most of these companies utilize direct network effects such as the number of users of their products increases the value of the product itself, others rely on more indirect network effects, such as Netflix, whose movie recommendation system improves as a result of more users of the product, improving users’ experience with the product itself. Other examples of network effects detailed in this article are how Amazon’s platform attracts millions of users, which in turn results in many third-party sellers willing to work with Amazon, or how Google’s continuous improvement of search results using its PageRank algorithm beat out other search engines such as Yahoo’s, resulting in more customers, resulting in a better algorithm, and so on.
These network effects relate to the network effects we discussed in class, as these large companies dominate their respective markets, and it is very difficult for outsiders to enter the market as their equilibrium pricing is most likely unattainable, so their market demand would be pushed downwards towards zero. Additionally, since these large companies have a large network benefit from users purchasing their product, their equilibrium values are likely very high, and they have already reached those values. This continues a cascade of sorts, where more and more users begin to rely on the product.
https://uk.finance.yahoo.com/news/tech-firms-networks-beat-rivals-104900572.html