The 60-Second Read:
A network effect occurs when the value of a good or service increases the more people use it. Think of smartphones: It’s easier to connect with friends when they are already on the service you are using, and it’s easier for developers to release a mobile app on an operating system that already has a lot of users.
When belonging to a network creates this much value, users want to stay, and therefore some digital services seek to create these kinds of valuable networks to entice users to stick around. This means that network effects can impact how competition takes place.
Network effects can be used as evidence of monopoly power by showing that an industry has high barriers to entry. The question is how easily can a new network compete with an existing one. Additionally, a judge may find that more aggressive forms of competition are too effective due to network effects, making a borderline or normally lawful act a punishable anticompetitive act. But modern thinking and a number of counterexamples caution against using network effects to take high barriers of entry as a given without supporting evidence.