What characterizes network economies?

• A. Value to each user decreases as installed base grows.
• B. Value to each user increases with installed base; followers must heavily discount to compensate for lower network value, which becomes unrealistic.
• C. Network size has no impact on value.
• D. Only leaders benefit from networks; followers lose value.

Answer: (B)

Network economies hinge on network effects: the value of a product or service rises as more people use it. As the installed base grows, each user gains more connections, more data, and better-compatible complementary products, making the network increasingly valuable to everyone in it. This creates a positive feedback loop where value per user climbs with size, encouraging even more adoption.

For those joining later, the only way to compete with a larger network is to offer steep discounts to offset the lower network value they initially face, but such discounts tend to undermine profitability and aren’t a sustainable long-term strategy as the network scales. That’s why the enduring characteristic is that value to each user grows with the installed base, and trying to compensate followers with heavy discounts becomes impractical.