Much of what basic microeconomics discusses is that a demand for a good is independent of somebody elses demand for that same good. For Example, Adam’s demand for a new car depends on Adam’s tastes and income, the price of the car and perhaps the price of other automobile companies in substitute. But it does not depend upon awais or sarwar’s demand for a car. This assumption has enabled us to obtain the market demand curve simply by summing individuals demands.
However, for some goods one persons demand also depends upon the demand of other people. Lets say, the demand for a particular product by a person is just because other people are also demanding it. So there is a possibility that Adam is demanding a car just because all his other colleagues have it . And if this is the real scenario than there is the presence of NETWORK EXTERNALITY.
Types if network externality
Network Externalities can be of two types
Positive and Negative Network Externality
A positive network externality exists if the quantity of a good demanded by a typical consumer increases in response to the growth of purchases of other consumers. See the above example of Adam , which is positive externality. He is demanding it just because others are buying it for themselves. And if the quantity demanded decreases then it is a negative Externality. The concepts will be discussed by in the next posts.