Butterfly Economics by Paul Omerod

The Economic Implications of Interaction

Traditional microeconomic theory posits the existence of a vacuum wherein each individual makes a set of choices completely independently of the influence of others. By making such a leap of faith, it becomes much easier to forecast the potential implications of a set of actions. Unfortunately, in testing the validity of such forecasts, they are generally found to be largely inaccurate. Omerod contends that such a division between theory and reality exists because of a fundamental flaw, the exclusion of influence. He believes that interaction between decision makers is a key influence that cannot be ignored and that in including the effects of interaction into economic theory can depict reality much more closely.

Implications for the Internet

Infomediaries

If interaction is indeed a key economic force, then the ability to influence decision-making becomes a most valuable resource. In the absence of the Internet, influence can be wielded through a variety of means, whether through traditional media efforts or through simple conversation among decision-makers. However, these options sacrifice richness for reach in the case of mass media or reach for richness in the case of individual conversations. The ability to rapidly and thoroughly disseminate information gives the Internet the potential to wield incomparable influence. In particular, infomediaries, such as C/Net for electronics, can provide rich, objective analysis to a wide audience, making them particularly effective at influencing decision-makers. Companies need to realize the strength of the Internet as a force for influence and actively court infomediaries and other sources of persuasion to stimulate use of their products or services.

Other Implications – Don’t Just Attract Value, Capture It

Switching Costs and Network Effects

Even if a company is able to tap the Internet as a source of influence, simply stimulating trial is not sufficient. Influence can bring business to a company’s door, but it’s the company’s role to find a way to capture it. To capture lasting economic benefit, a product or service must achieve some sort of network effect or incorporate switching costs, classic bastions of defense to create sustainable advantage. As well as influencing decision-makers, the Internet can also play a role in these machinations through such features as personalized portals. However, the key to remember is that attraction is critical, but retention is paramount.