Network Effects: What They Are and How They Work

What Is the Network Effect?

By Jeremy Bowman – Updated Oct 12, 2025 at 11:46 PM EST

Key Points

Network effects strengthen ecosystems by increasing value as more users join.
Investing in companies with undeveloped network effects can yield high returns.
Social media, e-commerce, and payment networks are key sectors with network effects.

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Group of people holding cups of coffee and using their cell phones. — Image source: Getty Images.

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Social Media

Social media are internet platforms that facilitate the creation, sharing, and discovery of user-generated content.

Not only does it become more valuable, but the increased numbers of people on a platform incentivize more people to use it as the network expands. When a business has network effects, it enables them to have a number of competitive advantages and can lead to higher profits.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Jeremy Bowman has positions in Airbnb, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Airbnb, Amazon, Etsy, Meta Platforms, PayPal, Uber Technologies, and eBay. The Motley Fool recommends Lyft and recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2025 $75 calls on PayPal. The Motley Fool has a disclosure policy.