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The Philadelphia Inquirer Andrew Cassel Column
Andrew Cassel
KRTBN Knight-Ridder Tribune Business News: The Philadelphia Inquirer - Pennsylvania
Copyright (C) 2000 KRTBN Knight Ridder Tribune Business News; Source: World Reporter (TM)


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 use worldwide.

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 conservative loyalists.

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.


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