Network effects and demand

Example numbers — the demand model’s numbers are for illustration, not from the power market.

Demand model
Price
Network strength k
0.1
Market change ÷ individual change = c ÷ (c − k)×2 elasticity: individual 0.647 · market 1.222

When others buying makes you want it more, a price change works twice: the price itself moves demand, and the change in buyers moves it further. So market demand is more price-sensitive than any one buyer’s.

02040600510Quantity QPrice P

Individual demand (buyers fixed) Market demand (buyers change too) Individual demand at other buyer counts

QuantityChangeArc elasticity
Start (P0)40——
Individual (P1)45+12.5%0.647
Market (P1)50+25%1.222

Model assumption: straight-line demand P = a + k·n − c·Q with Q = n (everyone alike). Only the direction (a bandwagon makes market demand more elastic) is in the study guide; the formula is a learning supplement. Elasticity uses the same midpoint formula as the price elasticity tool.

Not in this calculation

  • Tipping points where the effect explodes — this is a straight-line model
  • How adoption spreads over time
  • Other kinds such as the snob effect (others buying puts you off)
  • Welfare under a price cap — see the price ceiling tool
  • Real values of k for any product — electricity is not usually a network-effect example

Using the example values

Tool: Renuary (CC BY 4.0) · Numbers are examples. Method and limits on the original page.