Tell me at the first instance how can you comprehend the Work NETWORK EXTERNALITY ? By Network, we mean Individuals. And Externality is a cost or benefit that is incurred not on your choice. In Economics,
Network Externality is a case when people’s demand is dependent upon the purchases of other people.
Many times there are cases when you are influenced at buying something just because Others are buying it. In other words, your demand for some product is dependent upon the demand of others for that particular product.
You would probably have come across such questions like
- I have seen that a lot of people are buying stuff from the new fashion brand. So I also thought to give it a try.
- I like the new Corolla design because so many people are already buying it.
- Let have a dinner at the Mexican restaurant. I usually see a lot of Crowd there.
So you get to be influenced by so many thing just because others are trying it.
Positive and Negative Network Externalities
Network Externalities can both be Positive and Negative.
Positive Network Externality
A Network Externality is Positive when your quantity Demand increase is dependent upon the purchases of other people.
Negative Network Externality
It is negative when your Quantity Demanded Decreases because of growth in other consumers purchases.
The Band Wagon Effect
A Band wagon Effect is a positive Externality in which consumers desires to buy something is because others are buying it.
This usually happens to adults and kids who desires to buy what others of the same age group are buying. games, Sports material, clothes and trendy dresses etc. This effect can be used very well regarding Marketing and Advertising which are considered very successful.
Snob Effect is considered to be a Negative externality in which Quantity Demanded Falls because of others buying the same product.
Additionally, in such case consumers are willing to buy a luxurious and unique product. And the Snob Good is higher the less people own that good. You can also take example of Mercedes Benz, Rare art works, paintings, crafts, hand-made unique products etc, It is the Prestige and Status that one receives from having such Goods.
If you require to have a graphical explanation, feel free to ask .