The economics of Group forming Network theory

I came across David Reed recently, who has done some very interesting work around networks and their economic value.

Here are some highlights from Reeds paper on Reeds Law

In networks like the Internet, Group Forming Networks (GFNs) are an important additional kind of network capability. A GFN has functionality that directly enables and supports affiliations (such as interest groups, clubs, meetings, communities) among subsets of its customers. Group tools and technologies (also called community tools) such as user-defined mailing lists, chat rooms, discussion groups, buddy lists, team rooms, trading rooms, user groups, market makers, and auction hosts, all have a common theme—they allow small or large groups of network users to coalesce and to organize their communications around a common interest, issue, or goal. Sadly, the traditional telephone and broadcast/cable network frameworks provide no support for groups.

In "real" networks, it is important to note that although the total value of optional transactions that involve pairs and groups grows faster than linearly, the total price that can be paid cannot grow that fast. Typically, the consumers of the value have money and attention resources that scale linearly with N. So the law of supply and demand will kick in, lowering prices until the available resources (dollars and attention) are saturated. What's interesting is that this saturation process affects all types of optional transactions-so GFN value, peer transaction value, and broadcast content value all compete for the same resources. Once N grows sufficiently large, GFN transactions create more value per unit of network investment than peer transactions, and peer transactions create more value per unit of network investment than do broadcast transactions. So what tends to happen is that as networks grow, peer transactions out-compete broadcast content in the arena of attention and return on investment. And remarkably, once N gets sufficiently large, GFN transactions will out-compete both of the other categories.

And finally

As digital networking brings scale and global reach to all aspects of our lives and activities, there will be many more ways that we'll see scale driven value shifts that threaten established business networking patterns. For example, health care networks may move from treatment transactions to collaborations around disease management. Risk management in the financial services sector may move to group-forming structures that facilitate management of "micro-risks". How will it impact your business and your industry?

I'd like to close with a speculative thought. As Francis Fukuyama wikipedia argues in his book Trust , there is a strong correlation between the prosperity of national economies and social capital, which he defines culturally as the ease with which people in a particular culture can form new associations. There is a clear synergy between the sociability that Fukuyama discusses and the technology and tools that support GFNs-both are structural supports for association. As the scale of interaction grows more global via the Internet, isn't it possible that a combination of social capital and GFN capital will drive prosperity to those who recognize the value of network structures that support free and responsible association for common purposes?

This work I believe supports the throries and ideas Tomi and I have developed in our book. And it was a blessing to come across Reed's work.

The world as many now argue is no longer premised on top-down hierarchical structures, with controlled distribution and trickle down effect. The world is now horizontal where connectivity and collaboration (peer-to-peer networked flows of communcation are the keys to success.

Comments

[Lisa Strutton]

The Group Forming Network Theory seems a bit complex, but I think it's interesting to see where it can lead