3. Network Externalities
Networks exhibit positive consumption and production externalities. A positive consumption externality (or network externality) signifies the fact that the value of a unit of the good increases with the number of units sold. To economists, this fact seems quite counterintuitive, since they all know that, except for potatoes in Irish famines, market demand slopes downwards. Thus, the earlier statement, "the value of a unit of a good increases with the number of units sold," should be interpreted as "the value of a unit of the good increases with the expected number of units to be sold." Thus, the demand slopes downward but shifts upward with increases in the number of units expected to be sold.
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