Saturday Sep 20, 2008

Strong Positive Feedback and Tippy Markets

In network economies, the number of compatible users (or network end points) determine the value of the network. In such economies, one may experience strong negative or positive feedback. When the number of compatible users goes down, the network will eventually suffer a "vicious" cycle of collapse. On the other hand, when the number of compatible users goes up, the network will enjoy a "virtuous" growth cycle.

In Web 2.0: A Strategy Guide — Business thinking and strategies behind successful Web 2.0 implementations, Amy Shuen writes:

When two or more companies are in a competitive race for market share where there is strong positive feedback due to network effects, only one company emerges as the winner. (Economists call this market tippy because it can tip in favor of one company or the other.) Strong positive feedback can lead to a winner-take-all market dominated by a single firm or technology.


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