Network effects are when a product or service becomes more valuable for its users as more people use it 🌍

Many marketplaces, by nature, have network effects.

Take eBay for example: more sellers on the platform leads to a wider variety of items being available, attracting a larger pool of buyers who want to buy those items 🛍️

More buyers, in turn, means more people that sellers can sell their products to, which attracts even more sellers who want to make money!

For buyers, eBay becomes more valuable when there are more sellers, and for sellers, eBay becomes more valuable when there are more buyers ♻️

Network effects can be a huge competitive advantage for marketplaces, and are one of the reasons why some of them, like Uber and Airbnb have grown so big 🏰

This is because once a marketplace acquires enough users, the value it provides both buyers and sellers may be much greater than what a smaller, competing marketplace can provide 🌐

Buyers want to go where there is the most selection and the lowest prices, and sellers want to go where they can sell the most stuff!

As an investor, you want to find businesses with competitive advantages, so when looking at any marketplace, try examining how strong its network effects are 📈