Knowledge Products and Network Externalities: Implications for the Business Strategy

This article analyses the changes in production and demand for knowledge products arising from network externalities. The demand curve of a product under network effects is concave in shape. This specificity is determined by the intrinsic value (value that it itself contributes), the marginal value (value contributed to other users of the network) and the relative size (size of the network in relation to the size of the market). The analysis reveals two distinct patterns of behaviour in knowledge-based products. Observable knowledge products are governed by the effect of direct and indirect network externalities. Also, their demand curve and business strategy depend on new-user entry (marginal value) and the relative size of the network. However, tacit knowledge products are governed by learning network externalities and their demand curve, and business strategies are dependent on the value generated by the addition of the goods themselves to the network (intrinsic value). Copyright Springer Science+Business Media New York 2015