Exploring
Network Economics
[via Abhay Bhagat]
Michael Mauboussin writes:
Economists have successfully described the economics of both
information and networks. These economic principles appear durable.
It is the combination of information and network properties that
creates opportunities for businesses and investors. Most investors
have not internalized these ideas.
We believe the importance of information-based networks is
increasing in todayÂs global economy for four reasons:
1. Physical capital needs are lower than they were in the past.
Information-based networks require less capital as they grow than
physical networks do.
2. Networks demonstrate increasing returns. Most industries
benefit from supply-side increasing returns to scale: higher volume
leads to lower unit costs, up to a point. In contrast, successful
networks generate increasing returns from the demand-side as users
beget users.
3. Networks can form faster and more frequently than in the
past. Because of plummeting communication and computing costs, the
barriers to creating a network are declining. But even though the
barriers to entry are low, the barriers to success remain high.
4. Networks can spread globally. Because many networks have high
upfront costs and low incremental costs, they can expand rapidly
within countries and across borders.
This report focuses on how to categorize networks, how they
affect economic value, and how they form.