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Network Externalities (Effects) S. J. Liebowitz Stephen E. Margolis S. J. Liebowitz: Management School, University of Texas at Dallas, Richardson, Texas 75083 Stephen E. Margolis: Department of Economics, North Carolina State University, Raleigh, North Carolina 27695 1. What are Network Effects? Network externality has been defined as a change in the benefit, or surplus, that an agent derives from
Diagram illustrating the network effect in a few simple phone networks. The lines represent potential calls between phones. As the number of phones connected to the network grows, the number of potential calls available to each phone grows and increases the utility of each phone, new and existing. In economics, a network effect (also called network externality or demand-side economies of scale) is
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