Network Economics

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Uses:

- Machine scheduling

- Network reliability testing

- Building evacuation.

The minimum cost flow problem: This problem concentrates on both costs and capacities associated with the links and one must satisfy the demands at the destination nodes, given supplies at the origin nodes, at minimal total cost associated with shipping the flows, and subject to not exceeding the arc capacities.

Uses:

- Warehousing and distribution

- Vehicle fleet planning

- Cash management

- Satellite scheduling.

Disadvantage

- Network Externality: A network externality represents the scale of economy on the demand side and it frequently exists in the network industry. The world has two perspectives towards network externality:

- The consumer’s perspective: A “network externality” is the added benefit a consumer gets as additional consumers join the same network or use the same product.

- The competitive firm’s perspective: A rival’s “network externality” is a barrier to entry. Once a firm has the market lead and provides the greatest network benefit to subscribers, rivals must not only beat the price and technology of the leading firm, but must do so by enough to compensate consumers for the network benefit they lose in switching from the leader to the smaller rival.

There are two types of network externalities:

- Direct externality: A consumer’s utility depends not only on price but also on a network scale in the communications service. Since the private benefit in lower than the social benefit under network externality, thus the privately-owned networks are smaller than the socially optimal level.

- Indirect externality: Even if the scale of a network does not influence a consumers selection, a large variety of things is available.

- Example: The Qwerty keyboard. QWERTY was designed in the 1890s and was generalized as one of the most inefficient keyboard but it holds the Market monopoly and Because of the network effects and lock-in we still use it. There are better keyboards available e.g. Dvorak but we still use the qwerty keyboard.

Conclusion: Network Economy plays a major role in the market, the network industries are very important in shaping the modern economy. The network externality exists on the demand. On the other hand, the network industries are merging and increasing the complexity of the network. Also it is impossible to predict the result of the industries but we can know for sure that he network economics are helpful in the social sector.

References:

- Broadband Economics, Graduate school of economics, Kyoto university.

- Managerial Economics by FT Prentice Hall.

- “Networks, Telecommunications Economics, and Digital Convergence” by Prof. Nicholas Economides

- Wikipedia