Issues of Network Effects

Published by Mario Oettler on

Market Tipping

While (positive) network effects sound great, they threaten a decentralized world at the same time. If a single service receives too many users, it makes all other services redundant. This is called market tipping.

For example, if you want to use rollups, you will likely choose the rollup service that has the most users. This gives this service a little edge over its rivals. It will gain even more users. In the end, smaller providers lose more users and cannot compete. The consequence is that we have a monopoly.

Lock-In and Switching Costs

Closely related to market tipping the lock-in effect. It describes the issue that changing the service causes costs. These can be financial costs or time to research and learn about other services.

Penguin Effect

New services have the problem of explaining why users should switch to them, even if they offer a better product (lower prices, more features, etc.). Users might hesitate because they don’t know whether the new product will become the new standard. And if not enough other users follow, the value drawn from the new service is relatively small. This effect is also called the penguin effect. A group of penguins on the shore wants to go fishing, but they fear that predators are in the water eating the first penguins entering the water. If the first penguins jump in and don’t get eaten, others follow because the risk seems considerably lower.