Positive network effects are often viewed as a two-edged sword for firms because they:

Question

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Positive network effects can lead to higher market share for a firm as more customers adopt the product or service, but at the same time, it can limit the firm's ability to raise prices. This is because customers become more dependent on the network, and any attempt to raise prices may cause them to switch to a competitor, resulting in lower market share. Therefore, firms need to be careful in managing network effects to balance the benefits of increased market share with the risk of limiting their ability to increase prices.

Positive Network Effects Are Often Viewed as a Two-Edged Sword