In the absence of network effects, the value of a product or service increases as the number of users grows.
The video game console market is a network market in which Sony's PlayStation 2 (PS2) dominated over Microsoft's Xbox offering. This has been possible due to:
Firms that constantly innovate do so to develop open standards for competitors to become compatible.
In a market influenced by network effects, the winning product or service is often determined by its technical superiority, with technically strong newcommers able to unseat the dominant incumbents.
Network effects do not influence all consumer products or services.
The value derived from network effects comes from three sources: exchange, staying power, and complementary benefits.
Network effects are characterized by a positive-feedback loop, where the biggest networks continue to grow bigger. What implication does this positive-feedback loop have for network markets?
These three value-adding sources—exchange, staying power, and complementary benefits—often work together to reinforce one another in a way that makes the network effect even stronger. When users exchanging information attract more users, they can also attract firms offering complementary products. When developers of complementary products invest time writing software—and users install, learn, and customize these products—switching costs are created that enhance the staying power of a given network. From a strategist's perspective this can be great news for dominant firms in markets where network effects exist.The larger a firm's network, the more difficult it becomes for rivals to challenge its leadership position
D. a dominant market share does not necessarily translate to greater profitability for a firm.