Network effects occur when a product becomes more valuable to each user as the total number of users grows. A telephone offers a clear example. A single telephone is useless, since there is no one to call. As more people own telephones, the value of owning one rises for everyone. Many digital platforms, from messaging services to online marketplaces, share this feature.
Network effects shape competition in a distinctive way. Because users gain from joining the largest network, a platform that pulls ahead early can grow faster still, while smaller rivals struggle to attract anyone. A modest early lead can therefore harden into a durable advantage. Economists sometimes describe such markets as tipping toward a single dominant provider.
Yet dominance built on network effects is not always permanent. If users can belong to more than one platform at once, a behavior known as multihoming, the advantage of size weakens. A user who already has accounts on two messaging services can switch between them at little cost. Where multihoming is easy, even a large network can lose ground to a newcomer that offers a better feature.
According to the passage, a network effect occurs when
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