Kenneth C. Laudon,Jane P. Laudon Management Information System 12th Edition pdf

network economics

. In traditional

economics—the economics of factories and agriculture—production

experiences diminishing returns. The more any given resource is applied to

production, the lower the marginal gain in output, until a point is reached

where the additional inputs produce no additional outputs. This is the law of

diminishing returns, and it is the foundation for most of modern economics.

In some situations, the law of diminishing returns does not work. For

instance, in a network, the marginal costs of adding another participant are

about zero, whereas the marginal gain is much larger. The larger the number of

subscribers in a telephone system or the Internet, the greater the value to all

participants because each user can interact with more people. It is not much

more expensive to operate a television station with 1,000 subscribers than with

10 million subscribers. The value of a community of people grows with size,

whereas the cost of adding new members is inconsequential.

From this network economics perspective, information technology can be

strategically useful. Internet sites can be used by firms to build communities of

users—like-minded customers who want to share their experiences. This builds

customer loyalty and enjoyment, and builds unique ties to customers. EBay,

the giant online auction site, and iVillage, an online community for women, are

examples. Both businesses are based on networks of millions of users, and both

companies have used the Web and Internet communication tools to build

communities. The more people offering products on eBay, the more valuable

the eBay site is to everyone because more products are listed, and more

competition among suppliers lowers prices. Network economics also provides

strategic benefits to commercial software vendors. The value of their software

and complementary software products increases as more people use them, and

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Chapter 3

Information Systems, Organizations, and Strategy

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there is a larger installed base to justify continued use of the product and

vendor support.

Virtual Company Model. 

Another network-based strategy uses the model of a

virtual company to create a competitive business. A