Network Industries in the New Economy

In this paper we discuss two propositions: the supply and demand of knowledge, and network externalities. We outline the characteristics that distinguish knowledge-intensive industries from the general run of manufacturing and service businesses. Knowledge intensity and knowledge specialisation has developed as markets and globalisation have grown, leading to progressive incentives to outsource and for industries to deconstruct. The outcome has been a mixture of more intensive competition laced with points and periods of high differentiation. The paper looks at what is potentially the most powerful economic mechanism: positive feedback, alternatively known as demand-side increasing returns, network effects, or network externalities. This section provides the basis for alternative demand curves that incorporate positive feedback and derives their potential economic and strategic consequences. We argue that the propositions of knowledge supply and demand, and the dynamics of network externalities create new situations for our traditional industrial economy such that new types of economies of scale are emerging and ‘winner takes all’ strategies are having more influence. Our second paper takes the argument further and looks at the nature of firms’ strategies in the new world arguing that attention to technology standards, technical platforms, consumer networks, and supply chain strategies have created a significant contribution to strategy models within the new economy