Network effects and demand
When others buying makes people want it more, market demand becomes more price-sensitive than any one buyer’s. Move the network strength and see.
Example numbers — the demand model’s numbers are for illustration, not from the power market.
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.
Individual demand (buyers fixed) Market demand (buyers change too) Individual demand at other buyer counts
| Quantity | Change | Arc 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
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