Network effects
A product becoming more valuable to each user as more people use it. An entrant must match the incumbent's user base as well as its product, which makes a leader hard to dislodge.
Where you will meet it
Network effects appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain valuation based on assets and when it is suitable
“It is weakest for companies whose value lies in intangibles the balance sheet does not carry: brands, research capability, network effects, assembled workforce.”
- Explain how a firm competes and where it stands in its industry
“Durable advantages, sometimes called moats, include scale, network effects, switching costs, patents and brands.”
Practise it
Practise network effects until it is automatic: questions that explain every wrong option.
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