The Explosive Value of the Networks

Abstract

Networks have always played a special role for human beings in shaping social relations, forming public opinion, and driving economic equilibria. Nowadays, online networked platforms dominate digital markets and capitalization leaderboards, while social networks drive public discussion. Despite the importance of networks in many economic and social domains (economics, sociology, anthropology, psychology,...), the knowledge about the laws that dominate their dynamics is still scarce and fragmented. Here, we analyse a wide set of online networks (those financed by advertising) by investigating their value dynamics from several perspectives: the type of service, the geographic scope, the merging between networks, and the relationship between economic and financial value. The results show that the networks are dominated by strongly nonlinear dynamics. The existence of non-linearity is often underestimated in social sciences because it involves contexts that are difficult to deal with, such as the presence of multiple equilibria -- some of which are unstable. Yet, these dynamics must be fully understood and addressed if we aim to understand the recent evolution in the economic, political and social milieus, which are precisely characterised by corner equilibria (e.g., polarization, winner-take-all solutions, increasing inequality) and nonlinear patterns.

Keywords: Network Effects, Network Value, Reed's law

JEL Classification: D85, D46, C51