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.