• Daniel

Network externalities

When the value a network constitutes for you depends on the number of users (e.g. the internet) it is said to possess network externalities. As the number of users increases, the value for every single user increases  - regardless of whether you connect to the new user or not. Systems for planning are no exception, where direct communication and direct connections are essential. To best explain this concept, we will divide it into three parts; (1) the network, (2) externalities and (3) the impact on you.

(1) The Network

There are many types of networks. A network of roads connects different cities, the same way a network of cables connects landline phones. The internet is another network, an infrastructure on which to build other types of networks  - the software Crescat amongst others. Different computers connected to exchange information. In the case of network externalities on virtual networks, being able to connect to more potential users is what drives the value.

(2) Externalities

Externalities are, often unintended, effects that affect a party who did not choose to incur that effect. They can be either positive (e.g. bees that pollinate flowers on their quest for honey) or negative (e.g. a company polluting a river with waste material from their production process). In the case of a digital network, these effects are positive more often than not, which leads us to the third part of this article: The impact of Network externalities on you.

(3) The impact on you

A social network with you as the only user would be pretty pointless - and the value next to nothing. But as friends and family join in, being connected to others leads to value - and the friend of your friend, with whom you have no relation, increases the overall value of the network. These effects of network externalities are unintended, (the initial goal was to be connected to friends and family), and yet you end up obtaining value nonetheless. To help better understand the different aspects of these effects, we should make a distinction between what sociologist Mark Granovetter calls weak ties, and what political scientist Robert Putnam calls bridging social capital.

Weak ties are all the people you would call acquaintances or that you have met but do not necessarily know. Weak ties are valuable, as they can connect you to a myriad of people frequenting completely different circles and networks than what you and your close friends (i.e. “strong ties”) do. This new network can, in return, offer tons of new opportunities and resources that you would not otherwise have, like the proliferation of information to a vast number of people. Bridging social capital refers to social networks between heterogeneous groups. Bridging allows different groups of people to share information, ideas, and innovation and builds consensus between groups that represent different and diversified interests and backgrounds.

Both weak ties and bridging social capital gives tremendous and unintended value created in the network. With these kinds of indirect effects, it can be hard to comprehend the direct value of a network. This is where Metcalfe’s law comes into play. The law states that

the effect of a network is proportional to the square of the number of connected users of the system (n2),

meaning: there is an exponential growth in value, as the number of users increases. Obtaining information from users, as everyone can access everything, becomes an automated task.

How we utilise Network Externalities

The platform we are developing here at Crescat is built upon network externalities, to increase the value for you as a user. By briding all users in one universal system, with the features needed to complete their tasks, we take collaboration to the next level! If you are interested in our solution, contact us. If you want to learn more about externalities and how to use them to your benefit stay tuned for our next article about what a silo system is and how a network platform is different!

The article is written by Daniel and Matteo in collaboration. Daniel is an intern at Crescat while Matteo is one of the founders. If you want to know more about either, look here.

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