The network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service. Ergo, it means that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service.
One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good - for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities.
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