Markets are places where people regularly gather to exchange goods and services.

Most of the markets

ted to display some kind of network effects. The participation in a market is directly correlated with the
net inventive the participant has compared to the effort the participant has to put in. In terms of an
equation if x is a participant’s interest to participate in a market and, z is the total number of
participants in the market then the multiple of a function of x and z should be greater than or equal to
p (the value that the participant gets by participating in the market).

r(x)*f(z) >= p

Now, since the participant’s willingness to

pay is dependent on the fraction of the
population using the good, it is very
important for the participant to estimate
the correct number of users for the
network.
For e.g. Very rare minerals like diamond
and platinum command very high prices
because of the number of other people
who are willing to pay the same price or
more. In such a case, a market participants’s
willingness to pay follows the adjacent
curve, where the user’s willingness to pay is
correlated with the number of other
participants in the market willing to by the
mineral, provided the user has a comparable interest in the mineral.

Common Incorrect Expectations

In a real world scenario, many a times markets collapse due to negative same side externalities.
Participants while evaluating their derived value often fail to consider the derived value for the market
as a whole, which in turn drives the market to instability. This is often caused as a result of information
asymmetry and herding mentality amongst market participants. For e.g. In stock markets, in wake of a
flash sale participants sell their stock in hopes of doing better than the market. But because of herding
behaviour, the entire market ends up doing bad and as a result of which it collapses causing negative
returns to all the market participants. In such a scenario where negative externalities might arise,
participants need to act in the interest of the market as a whole rather than on individual interests.

Uncommon expectations

Another aspect of evaluating network markets is estimating a participants perceived gain when the
participant has incorrect expectations regarding the size of the market. This is a very critical problem
because the market participants cannot calculate their willingness to pay correctly unless they can
account for the correct size of the market. For e.g. Considering the criterion we defined earlier, let’s
evaluate a user’s willingness to pay to attend a networking event. Each person x has an intrinsic interest
in attending the event, represented by a function r(x), and the event is more attractive to people if it has
more people, as governed by a function f(z). Counterbalancing this, supposing there is a fixed level of
monetary and physical effort required to register and attend the event, which serves the role of a
“price” p. Thus, if person x expects a z fraction of the population to want to participate, then x will
participate if r(x)f(z) ≥ p.

Considering if the time t proceeds in fixed intervals of periods then at t = 0 we have our initial
audience size. Now, the audience size changes dynamically as the event comes closer as new people sign
up and old people drop out due to other commitments. Here, at each value of t, the people evaluate
whether to attend the networking event based on their shared expectations. As people are myopic and
are unaware of what others are doing, the affect of their actions is often felt in the following time
 Stable Equilibria

period. Everyone evaluates the benefits of participation as

though the future will be the same as the present. Such a
behaviour is observed in places where people have relatively
limited information, and where they behave according to preset
rules. In the above example people’s willingness to pay follows
the adjacent curve. The effect of the change in network size is
observed on the willingness to pay in the future. We see that the
equilibria is stable at the point (z2,z2). There is an upward
pressure from below and downward pressure from above.
Stable equilibrium attracts population from both sides where as Unstable Equilibria
unstable equilibrium acts like branch points from which the
population diverges out into different directions. From a high
level perspective in markets which share uncommon expectations, the willingness to pay is follows a
continuous s shaped curve with multiple stable and unstable equilibriums depending upon the audience
size.