Q: I listened to the conversation you had with Rainer Cvillink the 2008 Web 2.0 Conference, where you describe your book.
http://odeo.com/audio/18939713/view
Please could you tell me what you mean by ‘network economics’ within the context of your book?

A: The field of network economics has a long history extending from infrastructure studies (electrical, gas, transportation, telecom networks) to financial studies (retail bank and credit card networks). However, only recently have the theories of network economics, often based on physical networks with capacity and congestion limitations, had to extend to the “business valuation” of online networks like the web involving digital goods, intangible value generated by knowledge, collective intelligence and experience goods along with new forms of monetizing/dollarizing/internalizing/capturing/redistributing network externalities and reaching
long tails/niches through advertising.

Of course network economists like myself realize that this is a “perfect storm” and has an enormous impact on the global knowledge economy and on national and global competitivity.

But until my book, very few of my academic colleagues in network economics had the interest or range of experience with Web 2.0 technology, global entrepreneurship, finance and high tech industry examples to explain the mechanisms of how network economics could impact financial markets, stock markets and upturn and transform whole industries /countries. My former Berkeley faculty colleague Hal Varian, now chief economist at Google approached the area from more of the digital economics side versus the network economics side. Former Columbia professor Duncan Watts approached the social network arena from the sociology side. Of course, the few network and often telecom-specialized economists that did write in this area tended to be highly visible expert witnesses and professors--like former Berkeley professors Mike Katz (now at NYU) and Carl Shapiro-- writing briefs for major antitrust/anti-monopoly cases such as the well-known Microsoft or Apple cases.

So in chapter 2 and 3, I provide network economic analysis on relatively straightforward and easy to read current Web 2.0 examples. I show how Google used 5 types of network effects and that compounded these effects helped Google win the competitive race even as a latecomer in search. I also point out that network effects cause tippy markets and that virtuous and vicious cycles can bring down even a market leader in the “battle zone” of 40-60% market share—using the AOL 2005 deal as an example. In chapter 3 I show the different ways that social networks and n-sided networks play a role in the business models of Facebook and Linkedin.

Thanks for your question. Now that I’ve written this, I’ll probably post your question on my OReilly book forum along with this response.

If you do read the book and like it please consider writing a review on Amazon. I’ll copy Kathryn and Laurel who can tell you more about how to do this and why it matters.