Lecture - Network Effects & Strategy

Lecture Network - BMGT 301 INTRODUCTION TO INFORMATION SYSTEMS Farris Pfeifer Almost everything I need to know about Brian Arthur Increasing

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Prof. Don Riley Almost everything I need to know about . . ..” Brian Arthur. “ Increasing Returns and the New World of Business ”. BMGT 301 INTRODUCTION TO INFORMATION SYSTEMS • “Traditional Economy” • Leverages physical assets • Supply-side economies of scale • Characteristics of physical assets? • Diminishing returns to scale • e.g., land, labor. • Industries in the traditional economy • Competitive (Oligopoly or Perfect competition). •“New Economy” • Knowledge/Information & Technology Intensive • Network Effects (Demand-Side Economies of Scale) • Increasing returns to scale. ! More units produced -> lower cost per unit ! manufacturing efficiencies from scale ! learning by doing ! Examples ! Automobiles, Coke, plastic, paper,… ! PC’s, consumer electronics ! Diminishing effect after a certain level ! GM has a market cap of 11 bn. Today? ! Microsoft has a market cap of 280 bn. ! Where factors drive Microsoft’s dominance/size?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
More units consumed –> higher value per unit ! Network effects, network externalities ,... ! Network product: product that displays significant network externalities number of users value to each user Linkages can be physical or virtual Direct Network Effects • Product is for person-to-person communication • telephone, fax machine, email, Instant Messenger • Output/information needs to be shared across users • Excel, Word, PowerPoint • Value relies on the volume of user-generated content • WWW, online communities • Value depends on number of sellers/buyers • Trading Exchanges Indirect Network Effects •Value depends on the quality and variety of complementary assets • Ferrari (Service) • Windows (Applications); PS3/XBox (Games Devp.) • Blue-Ray/HD-DVD (Movies Formatted) ! Metcalfe’s Law: The value of the network goes up as the square of the users! ! If the number of users (nodes) in a network is ‘n’, ! The value of the network to each user is proportional to the number of other users. ! The total value of the network (to all users) is proportional to n x (n-1). If each user gets a value of $1 from every other user in the network: ! A network of size 10 has a total value of ~ $100 ! A network of size 100 has a total value of ~ $10,000 A 10-fold increase in size leads to a 100-fold increase in value! Popularity – Power Law
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/23/2011 for the course BMGT 301 taught by Professor Wang during the Spring '08 term at Maryland.

Page1 / 9

Lecture Network - BMGT 301 INTRODUCTION TO INFORMATION SYSTEMS Farris Pfeifer Almost everything I need to know about Brian Arthur Increasing

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online