Managing In The Modular Age: Architectures, Networks, and Organizations

Chapter 7. THE ECONOMICS OF NETWORKS

Nicholas Economides

Introduction

Network industries play a crucial role in modern life.^[119] The modern economy would be very much diminished without the transportation, communications, information, and railroad networks. This essay will analyze the major economic features of networks. In the course of the analysis it will become clear that many important non-network industries share many essential economic features with network industries. These non-network industries are characterized by strong complementary relations. Thus, the lessons of networks can be applied to industries where vertical relations play a crucial role; conversely, the economic and legal learning developed in the analysis of vertically related industries can be applied to network industries.

Classification of Networks

Formally, networks are composed of links that connect nodes. It is inherent in the structure of a network that many components of a network are required for the provision of a typical service. Thus, network components are complementary to each other. Figure 7.1 represents the emerging information superhighway network. Clearly, services demanded by consumers are composed of many complementary components. For example, interactive ordering while browsing in a "department store" as it appears in successive video frames requires a number of components: a database engine at the service provider, transmission of signals, decoding through an interface, display on a TV or ...