Commons and Network Externalities

15Oct06

One of the more interesting economic topics I’ve encountered is the topic of network externalitites, and I think there is an overlooked relationship between network externalities and commons.

Network externalities exist when the value of a good rises and falls in proportion to the number of other people who have bought the good. A telephone is the classic example of a good with extremely strong network externalities. The only use of a telephone is to talk with other people. But you can only talk with other people on your telephone if they also have a telephone. Therefore, the value of your telephone to you rises with the number of other people who buy phones. If all of your friends have phones, but no one else does, then your phone is only good for chatting with your friends. But if everyone in town gets a phone, then your phone is useful for all kinds of things, from ordering pizza to letting your boss know that you’re running late. It all depends on the number of other people who buy phones.

Network externalities can be more indirect than that, while still remaining powerful. According to one model, software developers like to create software for Microsoft Windows because it has a lot of users who might buy the software. So the more that people buy Windows, the more software will be developed for it. But having more software for Windows makes it more valuable for end users like you and me, so Windows has a network externality effect for us, since an increase in the number of people who own Windows ends up making it more useful and valuable for everyone who already owns it. If that increase in value for end users leads even more people to buy it, then its attractiveness to software developers increases, and you quickly have a virtuous circle (or a vicious circle, if you are a fan of the Apple Macintosh or Linux) which results in Windows being a monopoly in the market for computer operating systems.

Many goods possess this sort of indirect network externality, to some degree or another. For example, my ukulele does not gain another octave in range just because other people take up the ukulele. But a larger number of ukulele players makes it more profitable for supporting products to arise: ukulele instruction materials, ukulele classes, ukulele organizations (a big shout out here to the Santa Cruz Ukulele Club), and more manufacturers whose competition lowers the price of ukuleles. Conversely, if no one else played the ukulele, there would be no supporting materials, organizations or industry and the value of my ukulele to me would fall significantly. So even this pure private good exhibits some degree of network externalities.

Which brings me back to commons. To whatever degree a given good will generate network externalities, providing that good as a commons will maximize those externalities precisely because the low cost of a commons will maximize the number of users. For example, here in Santa Cruz, our businesses manufacture and sell a lot of surfing gear, boogie boards, swim wear, beach wear, sunglasses, etc., etc. Those products attract business support because we maintain the beaches and ocean access as public commons, which leads to extensive use. By providing the beaches as a commons, we make them popular enough to become valuable to supporting industries, which in turn increases their value to current and potential users. A virtuous circle where everyone wins.

I believe that the beaches would generate less overall wealth if we sold them off for private use. Restricting the number of users would lead to fewer beach products, which would make the beaches less fun, and you suddenly have a vicious circle going. I suspect that beaches fall into the economically interesting case of a good that would be only modestly valuable in the private market but becomes much more valuable, for society as a whole, when provided as a commons.

When I get a chance to investigate the business school literature, I am sure that I will find well developed models for all of this. After all, real business people understand perfectly well that if you give away the inkjet printer for cheap, you can sell replacement cartridges for ever, or that having a loss leader for sale in your store can generate higher profits. It’s only in economics that you encounter serious scholars (along with a whole bunch of rightwing hacks) who insist that providing a commons is always, or almost always, inefficient. It is an idea of efficiency that doesn’t encompass the question of whether or not we are actually better off in the end.

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