Paypal – Best Example for network externalities

Network externalities is an expression for the phenomena that a product is getting more attractive the more customers are using it. Imagine there’s a credit card provider and you can only pay at 30 stores worldwide. The card can be for free or you can even get a 10% discount when you make your payment, I bet you would not even bother to carry it with you or fill a sign up form to get such a card. And now imagine that you can get a credit card that is accepted everywhere. In every country, every store, every ATM. In this case you would even accept to pay on top for such comfort.

This phenomena is called network externalities and can be seen in lots of business places. Let’s look at Facebook. To be honest, Facebook is crap in terms of usability. You see annoying ads that want to show you how to earn $500/day from your home (simple scam stuff), you see sponsored posts you don’t even care about. And everything you need to know (what your friends are doing) moved to the timeline that is so tiny that you often can’t even read it properly. Overall, there are social networks that are way better in terms of usability! Also Google Plus is better. But who cares? When your friends don’t use it you won’t care if it’s actually better. This is also a network effect and a perfect example is Paypal. Paypal became very popular within the last few years even though there are exactly the same ewallets, even with way better service, customer support and that are way cheaper. Some like Neteller are even free for money transfers. But still, Paypal is the market leader that will conquer every single niche even when it seemed unlikely. Best example is the move to the gambling industry. That means that you can even deposit with Paypal at online Casinos even though Paypal was not allowed to do so in the US. But in European countries it’s possible to make a deposit and withdraw now. This shows that Paypal tries to get into markets and niches where it was almost impossible to operate. It’s exciting to see how this will develop. The problem with network externalities is also that you as customer won’t benefit from it. You are forced to use a certain product or service even though it’s not the best and you don’t like it. This is not a good situation to be in.

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