Page 57 - Electronic Commerce

Chapter 1

opportunities that arise in the sweater markets. An illustration of such a network
32
organization appears in Figure 1-8.

Buy
Top
managers

Sell Buy

Sweater
Buy traders
Buy

Buy market
information
Retail clothing shops
Collect
Sell Sweater dealer Sell market
retail sales
information
information
Learning
Buy market Sell market
information information
Cengage
Market research firm
2015
Custom knitters ©

FIGURE 1-8 Network form of economic organization
Electronic commerce can make such networks, which rely extensively on information
sharing, much easier to construct and maintain. Some researchers believe that these
network forms of organizing commerce will become predominant in the near future. One
of these researchers, Manuel Castells, even predicts that economic networks will become
the organizing structure for all social interactions among people.

Network Effects
Economists have found that most activities yield less value as the amount of consumption
increases. For example, a person who consumes one hamburger obtains a certain amount
of value from that consumption. As the person consumes more hamburgers, the value
provided by each hamburger decreases. Few people find the fifth hamburger as enjoyable
as the first. This characteristic of economic activity is called the law of diminishing
returns. In networks, an interesting exception to the law of diminishing returns occurs. As
more people or organizations participate in a network, the value of the network to each
participant increases. This increase in value is called a network effect.
To understand how network effects work, consider an early user of the telephone in
the 1800s. When telephones were first introduced, few people had them. The value of

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