Theory of Network Externalities

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Theory of Network Externalities



Alternate name(s)

Theory of Network Effects

Main dependent construct(s)/factor(s)


Main independent construct(s)/factor(s)

Concise description of theory

Network externality theory has been defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes. Network externalities are common in technology products, usually involving communication and collaboration across multiple users, and network effects form an essential part of diffusion process. A technology/product is characterized by network externality when an increase in the number of users of the technology/product increases the value to other users, even after controlling for other characteristics of technology/product. This theory has been extensively used in IS to enhance understanding of technology adoption across myriad applications like gaming, social network services, blockchain, electronic commerce, payment systems, RFID and communication technology to name a few.

Diagram/schematic of theory


Originating author(s)

Michael L. Katz, Carl Shapiro, Joseph Farrell, and Garth Saloner- Economics

Seminal articles

Originating area


Level of analysis


IS articles that use the theory

1.    BELO, R.; FERREIRA, P. Free-Riding in Products with Positive Network Externalities: Empirical Evidence from a Large Mobile Network. MIS Quarterly, [s. l.], v. 46, n. 1, p. 401–429, 2022. DOI 10.25300/MISQ/2022/14712.

2.    SCHILLING, M. A. Technology Success and Failure in Winner-Take-All Markets: The Impact of Learning Orientation, Timing, and Network Externalities. The Academy of Management Journal, [s. l.], v. 45, n. 2, p. 387–398, 2002.

3.    TUCKER, C. Identifying Formal and Informal Influence in Technology Adoption with Network Externalities. Management Science, [s. l.], v. 54, n. 12, p. 2024–2038, 2008. DOI 10.1287/mnsc.1080.0897

4.    LIN, C.-P.; BHATTACHERJEE, A. Elucidating Individual Intention to Use Interactive Information Technologies: The Role of Network Externalities. International Journal of Electronic Commerce, [s. l.], v. 13, n. 1, p. 85–108, 2008. DOI 10.2753/JEC1086-4415130103.

5.    VISWANATHAN, S. Competing across Technology-Differentiated Channels: The Impact of Network Externalities and Switching Costs. Management Science, [s. l.], v. 51, n. 3, p. 483–496, 2005. DOI 10.1287/mnsc.1040.0338.

6.    YANG, W. et al. Knowledge innovation network externalities in the Guangdong–Hong Kong–Macao Greater Bay Area: borrowing size or agglomeration shadow? Technology Analysis & Strategic Management, [s. l.], v. 34, n. 9, p. 1020–1037, 2022. DOI 10.1080/09537325.2021.1940922.

Links from this theory to other theories

External links

Original Contributor(s)

Shalini Upadhyay

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