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The Philadelphia Inquirer Andrew Cassel Column
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Why are the Republicans going to such lengths to appear "inclusive" at
their convention here this week? And why did America Online just send me
yet another generous offer for free time if I sign up now?
The same phenomenon answers both questions: Network effects.
Not "network" as in NBC or CNN. And not as in the frantic networking
among delegates, lobbyists and media types here this week.
To economists, a "network effect" is what happens when a product or
enterprise grows in value with every new user.
The fax machine is a classic example: By itself, the first one was
worthless. The second, however, created a network, and every machine
added since has increased the network's value, making it predictable
that fax-machine sales would take off exponentially.
Or think of personal computers. Back in the Jurassic days before
Windows, many competing computers ran incompatible software. That meant
lots of choice but very limited usefulness. But then Microsoft -- which
"got" network effects early -- became the standard, igniting computer
Where do political parties fit in? Stay with me here. What's the most
compelling reason to be a Philadelphia Democrat, or a Delaware County
Republican? Ideology aside, the answer is that in each jurisdiction, the
majority party makes the rules, doles out the contracts, controls the
patronage -- and stays in power, year after year, for that reason.
Each election win increases the party's potential value to new
members. "Don't back no losers," was how they used to describe it in
Chicago. But to an economist -- network effects!
Stretching just a bit, we might think of national political parties as
the equivalent of an operating system -- what techies call a "platform"
-- for local party organizations all over the country. You get the
standard operating language, the customizable user interface, a
consistent look and feel, etc.
The national races also create a kind of network effect better known
in political columns as "coattails," which lots of mayors, legislators
and local office-seekers count on every Election Day.
There are other signs that network effects shape our politics. As
Prof. Nicholas Economides of New York University told me, network
effects create a game of "winner-takes-most." Coke and Pepsi can coexist
even if one has a slightly bigger share of the market. But once
Microsoft gained a critical edge over Apple, the latter was fated to
become a niche player.
Since the prize can be near-total market dominance, Economides
explained, competition in network-affected industries becomes especially
fierce. Competing firms go to sometimes extraordinary lengths to attract
customers, discounting or giving away their product for free in order to
achieve critical mass.
That explains those free America Online discs that show up in my
mailbox every couple of months. Whatever it costs them is less than the
potential value I would add to their product as one more customer,
surfing and viewing banner ads.
Political parties can't exactly cut prices for new customers, of
course. But they can create "discounts" in different ways. Finding jobs
or housing for immigrants fresh off the boat worked in the old days. So
did producing rural farm subsidies or job-creating public works.
This week, it's "reaching out" -- with the Republicans sounding
uncharacteristically warm and fuzzy while the national spotlight is on.
Some even ask whether those in charge have forgotten the GOP's
But viewed (correctly) as economics, you could say they're really just
discounting the product to capture the marginal consumer. Just another
case of network effects at work.