Network effects arise from the fact that the value of a product is determined by the increase in the number of users. Network effects can either be direct or indirect; the direct network effects involve a lot of communication whereby the value attached to a consumer is considered high when there are numerous responses from other consumers. Indirect network effect on the other hand comprises systems used in communication; it is largely dependent on the accessibility to complementary goods which is determined by the availability of potential consumers.
Strategic marketing implications arising from network effects can be attributed to competition within the market environment. The implications include; pricing methods, the value of products manufactured, and also the level of research and development. Network effects influence the level of organization within the market structure, the strategies made by firm managers, and the public policies. There is the tendency of new industries to choose to produce similar products as the existing industries in order to satisfy the consumer interdependency network that already exists within the market. The other marketing implication affected by network effects is the rate of implementation of new technologies.
Network effects determine the market structure by making similar products within the same market to have different market shares. This extreme result is attributed to differences that exist in consumer tastes and the marketing strategies used in each case. Small market effects lead to the development of various standards that aim to satisfy different consumer tastes, hence influencing a firm’s decision to improve on its competitive power by adjusting its prices and decision-making processes.