Economists use the term network good to refer to a product or service where one user’s utility depends, at least partly, on the utility received by other users. A fax machine is an example, since being the sole owner of fax is of little value to anyone; only when others in your business network also own fax machines does owning one provide value to you. Thus, a rational consumer would determine his or her preferences for such a good only AFTER learning the preferences of others.   This runs counter to the standard model of decisions in economic decision theory, where consumers come to a purchase decision with their preferences pre-installed; for network goods, the preferences of rational consumers are formed instead in the course of the decision process itself, not determined beforehand.   Preferences are emergent phenomena, in the jargon of complex systems.

What I find interesting as a marketer is that ALL products and services have a network-good component. Even so-called commodities, such as natural resources or telecommunications bandwidth, can be subject to fashion and peer-group pressure in their demand.  You can’t get fired for buying IBM, was the old saying.   Sellers of so-called commodities such as coal or bauxite know that the buyers make their decisions, at least in part, on the basis of what other large buyers are deciding.  Lest any mainstream economist reading this disparage such consumer behaviour, note that in an environment of great uncertainty or instability, it can be perfectly rational to follow the crowd when making purchase decisions, since a group may have access to information that any one buyer does not know.  If you are buying coal from Australia for your steel plant in Japan, and you learn that your competitors are switching to buying coal from Brazil, then there could be good reasons for this; as they are your competitors, it may be difficult for you to discover what these good reasons are, and so imitation may be your most rational strategic response.

For any product and service with a network component, even the humblest, there are deep implications for marketing strategies and tactics.  For example, advertising may not merely provide information to potential consumers about the product and its features.  It can also assist potential consumers to infer the likely preferences of other consumers, and so to determine their own preferences. If an advertisement appeals to people like me, or people to whom I aspire to be like, then I can infer from this that those other people are likely to prefer the product being advertized, and thus I can determine my own preferences for it. Similarly, if the advertisement appeals to people I don’t aspire to be like, then I can infer from this that I won’t be subject to peer pressure or fashion trends, and can determine my preferences accordingly.

For several decades, the prevailing social paradigm to describe modern, western society has been that of The Information Society, and so, for example, advertising has been seen by many people primarily as a form of information transmission.  But, in my opinion, we in the west are entering an era where a different prevailing paradigm is appropriate, perhaps best called The Joint-Action Society;  advertising then is also assisting consumers to co-ordinate their preferences and their decisions.    I’ll talk more about the Joint-Action Society in a future post.