Skip to main content

Network Effects in Online Sales

Network effects describe the benefits we can incur when we align our behavior with the behavior of others around us, and as such, they help to explain why individuals will often imitate the behavior of others. Network effects arise in our daily transactions and decisions all the time, and perhaps one of the most commonplace instances of this is in regards to the acquisition of products. Researchers at Oxford University analyzed 100 million app installations by Facebook users over the course of two months, and their analysis let them see the rate at which 2,700 different apps were downloaded on an hour-by-hour basis. Based on their findings, the researchers concluded that social influence was a key determinant to the popularity of an app and its rate of adoption.

Once an app had reached an adoption rate of about 55 downloads per day, the popularity of said app increased dramatically, resulting in the most popular apps having as many as 12 million downloads, whereas a typical app had only about 1,000 installations. The researchers also noted that above a certain threshold of popularity, popularity continued to snowball and result in even more popularity. This illustrates several related concepts in network effects, herding, and tipping points. The adoption rate of 55 downloads a day was a tipping point in the market of Facebook app installations, as there is upward pressure on the installation of an app once it has reached this point. Conversely, if an app doesn’t reach this threshold, then it likely will not be very successful since goods tend to have more value when they are widely used. We can also see the “rich get richer” phenomenon here, wherein the high popularity of an app brings that app even more influence and subsequent popularity so that it exponentially increases in downloads.


Leave a Reply

Blogging Calendar

November 2018
« Oct   Dec »