Network Effect: When too much is not always a good thing

Have you ever send your mates a refer-a-friend link just to get that $5 voucher?

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That serves as a good example of how the network can affect us in a good way. Wait.. what do you mean?

To put it briefly, networks enable users, businesses and organisations to come together, form relationships through online interactions which will eventually benefit each other. In most cases, when more people use it, the product/service provided becomes more valuable to its users.

So why does this matter?

Not only network effects benefit the society in terms of information dissemination, it also helps user like me to be able to voice my opinions better, feel empowered, but most importantly.. get that extra $5 voucher (who doesn’t like free stuff??)

Being an avid online shopper, I realize this concept from early on, when I started using eBay, to be exact. eBay allows users to participate in auctions, and because of network effects, these auctions are becoming more competitive than ever.

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When auctions become more competitive, the prices of the items will increase, which will benefit the sellers. Seeing this, more people will be attracted to sell their items on eBay, as auctions allow sellers to drive up their prices. However, as more sellers join the platform, prices will be pushed down again as supply increases, and more people will join eBay again as it offers a wider range of options.

Basically, as more and more people join the platform, more people will find the site to be more useful.

However, of course, it’s not all roses and rainbows. There are some real drawbacks with network effects once it reaches beyond the critical mass point.

In the case of eBay, as more sellers join the platform, selling different things, the number of frauds happening also increases. The platform is not as safe as it used to be, there are more fraudulent actions, more people selling counterfeit items and more people deliberately give misleading descriptions of the items they sell.

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Not only there are safety issues regarding the network effects in an online marketplace, juggling too many users often lead to poor customer support.

This is the result of a congested network, in which each additional user decreases the value of other users.

So perhaps, for businesses, network effects does not always mean a good thing, so instead of focusing solely on the “growth” of the network, it is just as important to focus on the “safety” and “engagement”.

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