What kind of effects arises due to network externality? Explain.

 Network externality, also known as network effect, occurs when the value of a product or service increases as more people use it. In other words, the value of a product or service depends on the number of other people using it. This phenomenon can lead to positive or negative effects on the market, depending on the context. In this answer, we will explore the different effects that arise due to network externality.

Positive Effects of Network Externality:

1. Increased Demand: As more people adopt a product or service, it becomes more valuable to other potential users. This creates a positive feedback loop where the product becomes increasingly popular, leading to increased demand.
2. Increased Productivity: Network externality can lead to increased productivity as more people use a product or service. For example, a communication tool like Slack becomes more valuable as more people use it. As more people join, the communication and collaboration within teams become more efficient and productive.
3. Network Effects Lead to Standardization: Network effects can also lead to standardization in industries. This is because, as more people adopt a particular technology or platform, it becomes more dominant in the market. For example, the QWERTY keyboard layout became the standard for typewriters and computers due to network effects.
4. Competitive Advantage: Network effects can also provide a competitive advantage to the company that first introduces a new product or service. As more people adopt it, the company gains a significant advantage over its competitors.

Negative Effects of Network Externality:

1. High Barriers to Entry: Network externality can create high barriers to entry for new firms. It can be difficult for a new company to enter a market where a dominant player already exists. This can lead to limited competition and monopolistic behavior.
2. Lock-In: Network effects can lead to lock-in where users are reluctant to switch to a new product or service. This can limit innovation and stifle competition.
3. Coordination Problems: Coordination problems arise when different groups of people are using different technologies. For example, in the early days of the internet, there were different email protocols which made it difficult for users to communicate across different platforms.
4. Privacy Concerns: Network effects can also lead to privacy concerns. As more people use a product or service, the data collected on users becomes more valuable. This can lead to data breaches and privacy violations.

In conclusion, network externality can have both positive and negative effects on the market. The positive effects include increased demand, increased productivity, standardization, and competitive advantage. The negative effects include high barriers to entry, lock-in, coordination problems, and privacy concerns. It is important for companies and policymakers to understand the effects of network externality and to address the negative effects to promote competition and innovation in the market.

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