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Friday, January 21, 2005
Network Effects vs Network Effects
Om questions whether Metcalfe's law has an upper bound, and whether eBay's reached it. My take: in most economic models, the utility of a network is represented by a U-shaped function - at some point, additional members of the network create disutility by increasing transaction and coordination costs (or decreasing signal/noise, if you like). Put another way, marginal utility has a bound, after which marginal utility becomes marginal disutility.
I think this is a lot closer to reality than Metcalfe's law, which is kind of only half the picture. So, yes, the marginal value of each new member to eBay is decreasing - that's only sensible.
He also thinks there's an MP3 price war looming - I thought it was already happening!!
Comments:
I think this also explains also why the underground music scene hit the crapper. Too many DJs. Social network/transactional costs of putting out a record got really high. Too much friction to float a new idea, to many minds to convince that something new was happening. People stick to the old. Independant publishing is the next big thing to die under its own weight ? Its already kind of a mess. Creating fluid communication of new information/sounds is critical in keeping network systems alive. And ya gotta drain the puss sometimes.
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