<p>There are two sorts of network effects a network good might have. It might have consumption externalities (such as with traffic) or it might have positive network externalities (such as with operating systems). The latter case is the case that your link discusses. I don't see a discussion of perfect competition in your link, but if you imagine a model in which consumers choose a level of some good with a positive network externality to buy at some price, equilibrium production should be less than socially optimal for the same reason that there is underproduction in perfect competition with any positive externality -- at the margin, consumers don't take into account the value buying the network good brings to other consumers. </p>

CC BY-SA 3.0
2015-06-17T19:23:53.760Z
2015-06-17T19:23:53.760Z
NickJ
<p>In networks economics, the socially optimum equilibrium is bigger than the one in perfect competition (see for instance, <a href="http://www.cs.cornell.edu/home/kleinber/networks-book/networks-book-ch17.pdf" rel="nofollow">Easley and Kleinberg 2010, Ch. 17</a>).</p>

<p>Why is that so? Could you provide me with an example?</p>

CC BY-SA 3.0
2015-06-15T17:32:28.077Z
Which book (and sections/chapters) are you referring to?
Konstantinos
CC BY-SA 3.0
2015-06-15T20:28:57.547Z
for instance here: http://www.cs.cornell.edu/home/kleinber/networks-book/networks-book-ch17.pdf
ocram
<externalities><networks>
Network goods in competitive markets vs. socially optimal network size
ocram
# Network goods in competitive markets vs. socially optimal network size

(Asked by: username_0 on 2015-06-15)

In networks economics, the socially optimum equilibrium is bigger than the one in perfect competition (see for instance, [Easley and Kleinberg 2010, Ch. 17](http://www.cs.cornell.edu/home/kleinber/networks-book/networks-book-ch17.pdf)).

Why is that so? Could you provide me with an example?

**Tags:** externalities, networks
> **Comments:**
> **username_1**: Which book (and sections/chapters) are you referring to?  
> **username_0**: for instance here: http://www.cs.cornell.edu/home/kleinber/networks-book/networks-book-ch17.pdf  

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## 1 answers

### Answer by username_2 on 2015-06-17. Score: 3

There are two sorts of network effects a network good might have. It might have consumption externalities (such as with traffic) or it might have positive network externalities (such as with operating systems). The latter case is the case that your link discusses. I don't see a discussion of perfect competition in your link, but if you imagine a model in which consumers choose a level of some good with a positive network externality to buy at some price, equilibrium production should be less than socially optimal for the same reason that there is underproduction in perfect competition with any positive externality -- at the margin, consumers don't take into account the value buying the network good brings to other consumers.


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