Who might possibly come out ahead in a recession? In industries with network effects (2-sided platforms, exchanges, markets, video games, computing software + hardware, social networks, etc.), the incumbent is typically placed in an unassailable position: positive feedback means that the big first mover just gets bigger, and wins the market. I’ve discussed in other work (“Economic and Technical Drivers of Technology Choice: Browsers” with Tim Bresnahan and “Competition between Exchanges: Lessons from the Battle of the Bund” with Estelle Cantillon) how there are narrow windows of opportunity and a critical set of conditions necessary for a second-mover to defeat a first-mover advantage under network effects. Specifically, being able to tap into new adopters, rather than trying to get customers of the incumbent to switch, and doing so when market demand is exploding, are key conditions. Large, market-wide, economic downturns are one of the great shake-ups that could generate just these conditions for an entrant. The economy contracts, firms drop out, customers drop out, but hopefully recovery follows. This means demand growth is now present, and a bunch of customers have been freed from switching costs that kept them with the incumbent. The entrant who can grab these customers returning to the economy might have a better shot at gaining market share in the presence of network effects than pre-recession. There is a glimmer of opportunity to be found in this recession. Of course, this is conditional on being able to hold out doing something else during the recession until the economy expands again.
As an economist, I find myself spending most of my time thinking about what kind of policies we can implement to foster innovation. A recent piece in The New Yorker (Jonah Lehrer, Annals of Science, “The Eureka Hunt,” July 28, 2008, p. 40), cuts down to a much finer level – the brain. What I find fascinating about this work is that much of what we think about the creative process – making connections between ideas that people hadn’t seen before; that radical innovation sometimes becoming harder as you become more of an expert in an area because you are familiar with a particular set of ideas – shows up in studies of the brain and appears to have a neuro-foundation.
As an economist, I always want to think of things in terms of the policies we’d want to pursue. To me this work suggests the advantage of being in environments where you are exposed to ideas that you wouldn’t typically encounter. That is a feature of highly interactive environments, whether it is Google! or the Niels Bohr Institute, where a ideas bounced around freely leading to a tremendous amount of creative science.
For more on the underlying research see Mark Jung-Beeman, who has a very cool website, and John Kounios on the cognitive neuroscience of solving problems with insight; Jonathan Cohen; Earl Miller; Sohee Park on schizophrenia and creativity; Jonathan Schooler on problem solving more generally. Here is a link to a longer piece on the relationship between this work and work on creativity in other fields.
I went online today to buy my best friend’s romance novel, Reckless, at Amazon.com. The first thing that came up upon going to Amazon was an advertisement for “Kindle: Amazon’s Revolutionary Wireless Reading Device.” E Ink ‘s first electronic reader customer was Sony, for the Sony Reader, released in September, 2006. Kindle wasn’t released until a year later (also using E Ink’s technology), but Kindle advertised access to 140,000 titles as opposed to Sony’s 10,000 titles(Sony looks like its bookstore now offers 50,000 titles, and in December 2008 Sony & Borders co-branded their eBook Store). While the numbers of Kindles and Sony Readers sold is not definitive, it would seem that probably more Kindles have been sold than Readers, despite the year lag.
It could be that Kindle is a better technology, although there are plenty of customer reviews on both sides, but repeatedly there are two forces that it doesn’t hurt to have on your side in order to defeat a first mover advantage: distribution and complementary assets. We’ve seen this with TiVo vs. the cable companies set-top box DVRs (I wrote a chapter about this), where a sufficient but worse product sold more units than a better first-mover due to incumbent position in the home and a superior distribution channel and complementary asset (cable access and the cable installation network). We’ve also seen this with the Browser Wars (I wrote a paper & a chapter about this), where Internet Explorer overcame Netscape’s lead in the browser market with the help of distribution through exploding PC sales & Windows as a complementary asset to control access to that channel of distribution.
So it’s not always sufficient to build the first or a better mousetrap (in itself, another story about complementary assests overcoming first mover advantages): figure out how to get distribution and complementary assets on your side.
First of all, thanks for getting the ball rolling on this, Pierre. It is particularly timely to be thinking about innovation now with the increased economic strength in Asia making innovation particularly critical for us, the aging of the workforce – I think that most people think of innovation as done by relatively young people; and energy prices increasing.
On the day when we found out that consumer prices have risen more in the past year than at any point since 1991, in large part because of the price of energy, one idea that I am intrigued by is that increased investments in energy technology now could lead to lower prices now even though they won’t pay for many years because it would make oil producers want to pump oil now rather than later.
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