From Cambridge to Eternity: “The Network Effect”
Quiz
with the unit dollar up for grabs: What would be the word for winning in the
competitive war to become California’s Air Hub between LAX (LA international airport)
SFO (SF airport)? Hopefully, nobody other than me would come forward with the
word “connectivity” as the answer.
Suppose LAX has 2,000 (N1) flight connections (to
other airports) while SFO 1,000 (N2).
On the other hand, “connectivity” means a bi-lateral
relationship between two spoke airports via the hub. Now, what will be the aggregate
number of connectivity through LAX vs. through SFO?
Most of us would have the answer: Clax=N1∙(N1-
1)/ 2= 2,000 x 1999/ 2 vs. Csfo= 1,000 x 999/ 2. To generalize, C= N∙(N-1)/ 2.
Then on, we can make a speedy guess that C≒ N2/ 2
when N is larger than, say, 100. This is the network effect, sometimes called “Metcalfe’s
law”: in other words, the efficiency of connectivity is geometric, more than just strategic.
Ceteris
paribus, the traffic in LAX is four times [(N1/ N2)2= 22= 4]
as busy as in SFO. There comes the cycle, virtuous to one and vicious to the
other. The one of larger budget and larger benefit to “customers” can increase
the connectivity far more easily than the other: as a result, the larger the
larger, the smaller the smaller.
Let
us broaden our perspective. Which would be preferable from the viewpoint of
Republic of California, two inter-continental Air Hubs or one? That would be a
piece of cake to most of us older than a 10th grader. Viva, Los
Angeles!
Real Questions Waiting
First off the top of head: What would
the “air trip” be called in economics, a good or a service? The answer is up
for grabs.
Corollary
questions: What about telecommunications, broadcasting, retailing, banking and finance,
car rentals, virtual businesses and so on so forth?
A
sincere second question: Which applies to the “air trip” & cet., the law of
diminishing returns or Metcalfe’s law?
A
serious third question: Which dominates the economy in modern times, services or goods?
A
fatal fourth question: What can we think of as “real quantities” of services? If
in banking and finance, what will be the “marginal” unit of “real” service, a
10-dollar deposit, a 100-dollar, a 1,000-dollar or anything else?
All Those Fond Theories in Macroeconomics
1) Real
quantities: So many “real variables” →
Real services?
2) The
IS-LM model with “real money,” “real saving,” “real investment,” “real GDP” and
the like →
Real?
3) The
AS-AD model, plain, static, “comparative static” or “dynamic” → Real?
4) The
Slow growth model subject to the law of diminishing returns → Where are the services?
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