Part 1: Some Interesting Facts, Laws and Observations Part 2: Externalities and Network Effects Externalities and Network Effects (Examples, Laws and Interpretations) Sumant Kulkarni International Institute of Information Technology, Bangalore Sumant Kulkarni Externalities and Network Effects 1/54
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Externalities and network effects (examples, laws and interpretations)
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Part 1: Some Interesting Facts, Laws and ObservationsPart 2: Externalities and Network Effects
Externalities and Network Effects
(Examples, Laws and Interpretations)
Sumant Kulkarni
International Institute of Information Technology, Bangalore
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Part 1: Some Interesting Facts, Laws and ObservationsPart 2: Externalities and Network Effects
Interesting FactsSome Interesting Laws
Part 1: Some Interesting Facts, Laws and
Observations
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Part 1: Some Interesting Facts, Laws and ObservationsPart 2: Externalities and Network Effects
Interesting FactsSome Interesting Laws
Agenda: Part 1
Some Interesting Facts
The Observation.
Some Interesting Laws.
Some Interesting Arguments.
My Observations on Laws.
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Market growth of Maruti Cars
Started in 1981.
Buying a car adds a new car to the group of Maruti cars.
More service stations will be started due to more cars.
Buying a new car with value X ⇒ Having a car with
value X + Better and cheaper service availability
Maruti is the only company in India, which has sold more than
10 million cars.1In March 2011, Maruti had 45% Indian car
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More vehicles on the Road
When the first vehicle comes on the road, there will be full
space for that vehicle.
No need to overtake, give way etc.,
As the number of vehicles increases, they will also start
occupying the space on the road.
The problem of overtaking, giving way to others etc., starts.
At some point, this starts looking like a congestion where,
there is no incentive to drive a vehicle on the road!!!
Adding New Vehicle worth X to the City Traffic ⇒Having Comfort worth X + More Pain to Travel + More
Expensive Travel
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Migration of People to USA
When first group of people moved to America, there had to
face lot of problems.
As more people moved to USA, they also better life as well as
the social life in USA improved.
New Person Moving to USA ⇒ New Person Having Met
His Expectations + Adding More social Life to USA +
Adding More to Technology
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Building Roads
Batter Roads (e.g. National Highways like NH4)
More number of people travelling in a route pressurized
government to make that route betters.
Due to better road and more people using (safety at night) it
attracted more people to use it.
Using Better Roads by paying toll X⇒ Travelling in
Better Road worth X + More Night-time Travel Safety
+ Better Restaurants
Today, you can reach Hubli from Bangalore in 6 hrs in Car withoutcrossing the speed limit!!! There are no reports of robbery in thenight as well.
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Social Networking
Initially few people join.
Every person joining the SN gets more people to interact with
and hence gains in terms of contacts and knowledge.
Every person joining the SN adds one more person to the SN
to interact with. This intern allows already using people to
get more knowledge.
New Persons Spending Time Worth X to Join Social
Network ⇒ More People worth X to Interact With +
More Knowledge
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Mobile Network
More users prompted more number of towers in the areas.
More towers increased the quality of service.
Also, more users offered low tariff.
Better QoS and Tariff attracted more users.
Spending value worth X to buy a Mobile connection ⇒More People to Interact With (worth value X) + Low
tariff + Critical Communication Possibility
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356CW
Initially by the end of 2011, they started around one bus/hour.
People started liking it.
More number of people using the bus prompted to run more
buses.
This might be helpful to reduce some amount of traffic.
New Person using 356CW ⇒ Less Money Spent on
Travel for him + Lesser Congestion
Today, in prime time, there is a bus every 5 min!!!
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Many more ...
People forming villages.
People buying more Nokia phone in early 2000s.
People buying Hero Honda vehicles in mid 90s.
Internet.
Arrival of IT Companies in Bangalore.
Plantations.
Electricity Consumption.
Mobile Network Congestion.
........
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What Did We Observe?
Joining the group of Product/Service users ⇒ Having thethe Product/Service + Change in the Welfare of theSystem/Third Party (and hence in own welfare).
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Some Laws Trying Explain the Above Observations.
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Metcalfe’s Law -1980
First proposed by Metcalfe in the context of Ethernet 3
devices (not in terms of users).
He hypothesized that the network the cost of adding new
elements increases linearly with each elements. But, the value
of the network increases in proportion to the square of
elements.
The reason for high values is the number of connection
possible in the network with n nodes is n(n-1) = O(n2)
3Metcalfe’s Law, Web 2.0, and the Semantic WebSumant Kulkarni Externalities and Network Effects 14/54
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Metcalfe’s Law - 1993
George Gilder, a writer and techno-utopian intellectual,
formulated Metcalfe’s Law for all networks (in 1993).
Highly important and accurate in small networks like LAN.
There are question about its accuracy to bigger networks.
The mathematical model only takes care of number of
possible connections. But, it does not take care of the
possibility of those many connections.
As number of users increase, it becomes difficult to believe
that the law holds good.
It is an approximation law(like Moors Law). Hence, does not
have any hard bindings!
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Reed’s 3rd Law
David P. Reed proposed 3 laws4 to comment on “how the
information architecture of our world interacts with the people who
inhabit (live in) it”.
3rd Law (a scaling law for network value): “As networks
grow, value shifts: Content (whose value is proportional
to size) yields to Transactions (whose value is
proportional to the square of size), and eventually
Affiliation (whose value is exponential in size)”
Content ⇒ Number of participants in the network.
Affiliation ⇒ a social or business relationship.
4http://www.reed.com/dpr/locus/dprpapers.html
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Reed’s 3rd Law
According to Reed, the value of a network is equal to the
number of group-forming-networks (GFN) it can form from
the available set of nodes/users.
“Even Metcalfes Law understates the value created by agroup-forming-network as it grows. Lets say you have a GFNwith n members. If you add up all the potential two-persongroups, three-person groups, and so on that those memberscould form, the number of possible groups equals 2n. So thevalue of a GFN increases exponentially, in proportion to 2n. Icall that Reeds Law. And its implications are profound.”6
6David. P. Reed,The Law of the PackSumant Kulkarni Externalities and Network Effects 18/54
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Reed’s other Laws (Optional)
Reed proposed 3 laws7 to comment on “how the information
architecture of our world interacts with the people who inhabit it”.
1st Law (on Long-term Data Storage): “If you want to keep
information for a long time, never separate the head
from the recording.”
With removable storage, ha a drive to read the data from it.
Example: Floppy and Floppy Drive
2nd Law (on communications): “Communications media
exist to confirm the prejudices of their audience.”
Most of the information given out on the media is already
know!!! They repeat it to satisfy the prejudices of people.
7http://www.reed.com/dpr/locus/dprpapers.html
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