Network externalities are when one individual’s utility for a good depends on the number of other people who consume the good. This concept drives the use of Facebook, for instance.

The snob effect is an accurate name for a term that may lead to a demand curve sloping upwards and occurs because of negative network externalities. This is because some people may value certain goods more highly simply because the price is high, especially if they know others will observe them consuming the goods. People gain value from having others notice that they are rich enough to afford to consume a good. Eg. expensive luxury cars.

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There is a conspicuous consumption effect (term coined by economist Thorstein Veblen) hence, goods whose sales actually increase when their prices rise are known as “Veblen goods”.

Additionally, the existence of positive network externalities gives rise to the Bandwagon effect where in the more number of people that buy the good the greater the demand increases. This is because the quantity demanded of a good that an individual buys increases in response to the increase in the quantity purchased by other individuals.

For further reading material visit:

(a witty easy-to-follow article) The Upshot- New York Times

Bandwagon Marketing- Forbes

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