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## 1.12 There is Power in Numbers: Network Effects and Metcalfe’s Law

Metcalfe’s lawThe value or utility of a network is proportional to the number of users of the network. states that the value or utility of a network is proportional to the number of user’s of the network. At one time, Metcalfe indicated that utility was a square function (utility = n2). For example, a phone network with 10 people has a utility of 100 and a network with 100 people has a utility value of 10,000. He has since scaled that back and the utility of a network is based on a log function (utility = n × log(n)).VC MIKE (2010). The log model is presented in Figure 1.7 "The Size of the Network Increases the Value of the Network". Thus, for a 100-user network, this would translate to utility = 100 × 2 = 200 or 200 utility units. The equation is not the important issue. It is the idea that if you have more people using a phone, a fax, railroad, a Web 2.0 application or whatever, your network will become more attractive and attract even more users. Consider the choice to go with a local cable TV network or a satellite TV network. If individuals take into account what network other people are choosing, then there is a network externality or a network effect that influences the decision.

In the economics literature, a network effect typically refers to a change in the positive benefit that a consumer receives from a good, when the number of consumers of the good increases.Liebowitz and Margolis (1994). Network effects are not limited to phone, wireless, and telecommunications networks. They can also include the following: