Technological networks are born from innovations. Metcalfe’s law predicts that the usefulness of a network increases with the number of users. All innovations allowing to transport an object (material, information, …) follow this law. Thus the same rule (with the exception of one factor) applies to cars (the more cars there are, the more infrastructure there is, and the more infrastructure there is, the more cars there is), to public transport (the more passengers there are, the more buses there are, and the more buses there are, the more passengers there are), to the Internet (the more flows there are, the more infrastructure there is, and the more infrastructure there is, the more flows there are), and to social networks such as facebook, twitter, … (the more information there is on the networks, the more users there are, and the more users there are, the more information there is).
From this law, we can predict two sources of gains:
- The user, with constant usage, will see the utility of the network increase (increased performance), thanks to other users using it,
- The company will see the marginal cost decrease (volume effect, compared to fixed costs and investments)
From a company point of view, the company that proposes an innovation can claim to be a source of positive externality, if its technology becomes more widespread. This follows a life cycle (bell-shaped), until a new technology replaces the previous one. This externality is complex to evaluate:
- How much responsibility does the company have for an individual’s innovation and talent?
- What role does society play in technological innovation and its diffusion?
- What is the share of the network effect of the internet in the development and therefore the network externalities of Facebook?
The evaluation of social gains for technological networks should not be limited to the evaluation of a simple social gain. Let’s take the example of a Google search.
If we first consider the social gain of a Google search without considering the value chain. This corresponds to the time spent searching in a library, on a given theme.
A small and arbitrary calculation: let’s fix the time to 1 hour of research with travel in a library, research of the cuts, …, versus an immediate result for Google. Then we can estimate the social gain (gross) at 6€ (the hour taken as a world average). Google claims in 2020, 2550 billion searches per year… that is a social gain of 15 000 billion dollars per year, about 17% of the Gross World Product.
We have a problem. Indeed, the gain from search comes at the end of the chain, and benefits from a network effect based on the posting of content online, on an Internet network, access from mobiles, …
Moreover, attributing 100% of the social gain to google is a quick reasoning: what would google be without the millions of contributors, free or paying, what would google be without the use of search tags, …
If we integrate a share (by taking the investments of google) versus the whole of the social investments that have allowed to contribute to the internet, then we fall into the opposite excess: we end up with a ridiculous share with regard to the whole of contributions, not only action to put on the internet, but the whole of the productions from Babylon to our days. Indeed, the transcription of the Pythagorean theorem on a wikipedia page, referenced on Google, must integrate the contribution of the scribe (the Wikipedia editor), but also that of Pythagoras, and of all the intermediaries who allowed the transmission of this knowledge.
We have explored both extremes. So, how to integrate the social contribution of Google. The only possibility is to integrate the research and development costs that allowed the search model to be developed, and thus to create an exception for innovations based on a network effect. To consider that the cost of this research is the effort required to obtain a search engine in the current environment.
This is not completely incoherent because without search engines, the internet would be a vast mess, in which users would quickly get tired, and would not have contributed as much. Google has created a monopoly for itself (which is also a source of negative externality in the economic field), but this has allowed a network effect, and a social benefit. We must simplify, at the risk of not coming up with anything.
The network effect as a source of externality is limited to a few actors. It must be codified, and a specific standard must be established to extract the social cost.