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-Through my eyes-

23 November 2005

Network Effect , Vendor Lock-In and Path Dependency

The network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service. Metcalfe's law states that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service.


In economics, vendor lock-in, also known as proprietary lock-in, lock-in, or the Pottersville pattern, is a situation in which a customer is dependent on a vendor for products and services and cannot move to another vendor without substantial switching costs, real and/or perceived. By the creation of these costs to the customer, lock-in favors the company (vendor) at the expense of the consumer. Lock-in costs may create a barrier to entry in a market that if great enough to result in an effective monopoly, may result in antitrust actions from the relevant authorities (the FTC in the US).


Path-dependence exists when the outcome of a process depends on its past history, on the entire sequence of decisions made by agents and resulting outcomes, and not just on contemporary conditions. A closely related concept is hysteresis, a property of systems (usually physical systems) whose states depend on their immediate history. These principles tell us that "history matters" in understanding social and physical sciences.



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