More on Network Externalities

I thought I'd copy this from some work I've been doing. It explains what I meant by "network externalities" in the previous post.

Network externalities refers to products for which the utility that a user derives from consumption of the good increases with the number of other agents consuming the good (Katz and Shapiro, 1985; Tirole, 1988). These can be positive, in the case of online auction sites; computer software; phones, faxes, and video games; or negative in the case of public road systems. These network externalities can be direct (physical) as in the case of two-way communications networks (Rohlfs, 1974); or indirect as in the case of software and auto service (Katz and Shapiro, 1985, 1994; Church and Ghandal, 1992b). Liebowitz and Margolis (1995b) have commented that the effects of network externalities are minor for most industries.

Whether this still holds true in 2005 is debatable.