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Online Communities&

The Economy of Knowledge

Nicolas Curien (CNAM)

& Michel Gensollen (Telecom Paris)

ESNIE-May 2005

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Sketchy Overview• The utopy of the « New Economy » (1995-2000)

misinterpreted the actual consequences of the « Digital Revolution ».

• The economic value will originate in « knowledge » rather than in « information ». Knowledge economy & society is much better a phrasing than Information economy & society.

• After Solow’s productivity paradox (1980), a second paradox now arises: the knowledge economy will be a hybrid one, gathering both features of a « market economy » and of a « public economy ».

• Online Communities constitute the key « informal institution  » of knowledge economy.

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2 Key-Drivers of the« Digital Revolution »

• Digitalization of information– Cultural goods (books, music, movies)– Software– Video-games

• Information intensive goods– Experience goods– Attention goods– Complex goods– Innovating goods

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2 Major Economic Implications

• The emergence of the informational «commons »– Information becomes a « non-rival » good,– despite of the current industrial and governmental attempts to

protect non rival but at least partially « excludable » contents (eradication of P2P seemingly to protect property rights…. and mostly to unduly protect the business of majors).

• The request for « meta-information »– In a complexified space of goods and services, economic

agents need higher compentecies– more « off-market » and/or « off-hierarchy » information is

necessary in order to supply, to innovate or to consume.

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What the « New Economy » Mistook• The initial simplistic and utopic view:

ICTs will tend to make– markets more fluid (B2B & B2C aiming at a perfect market),– hierarchies more controlable (aiming at a perfect bureaucracy),

thus:– generating increased efficiency and productivity gains,– without major changes in the organisation of economy, except for welfare

improvement.

• What really occurs:– more segmented markets,– « flatter » hierarchies with more elastic and permeable frontiers,– in depth transformation of many business models (especially contents

industries and information intensive industries),– Schumpeterian « destructive creation » making the assessment of welfare

impacts uneasy.

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From the « New Economy »to the « Economy of Knowledge »

• « Codified » information is a free input rather than a valuable output:– digitalization indeed creates value as it generates productivity gains,– but as digitalized information becomes a non rival good supplied at almost

zero marginal cost,– then optimal price approaches zero, so that economic value no longer can

be collected at this stage.

• A new type of scarcity originates in the « tacit » information necessary for:– matching supply and demand (info-mediation, Hayekian market),– coupling innovation to users’needs (as in open-source),– transforming information into knowledge at both the individual level

(learning process) and the supra-individual level (generation of management routines).

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3 Main Characteristics of the Economy of Knowledge

• Open model– Producers and consumers participate in the same « social algorithm »,– where info-mediation replaces the traditional direct hierarchy / market interface,– the consumer becoming active as a tester or even as a co-producer,– which leads to a better fit of « rational » production and « hedonic » consumption– in a world of fast innovation.

• Circulating goods– The repeated usage of informational goods does not destroy but creates value,– so that the free circulation of those goods benefits the collectivity,– that circulation being globally by itself a non rival asset,– even if some of the circulating goods individually are (or could be made) rival

(just as the Kula objects exchanged by Papouasian tribes).

• Consumption spillovers– Consumers benefit from critics and advices supplied by other consumers,– ex ante when making buy decicions,– ex post when learning how to use goods.

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2nd Paradox of Digital Revolution• Considered as a technological « neutral » platform:

– ICTs seem to reinforce the « market economy » and world-wide competition,– by enhancing transparency, universality, flexibility, fluidity of transactions.

• Considered as the vector of the digitalization of contents:– ICTs generate the typical characteristics of a « public economy », such as:– strong economies of scale (fixed cost economy),– powerful club effects (created by electronic networks and standards),– informational « commons ».

favouring: concentration (Microsoft) and/or cooperation (R&D, B2B monopsonies), rather than unrestricted competition (model of « coopetition »).

• The actual « new economy » will be a « hybrid economy »,– mixing the features of the two opposite models (dialectic rather than

dichotomic evolution!),– relying upon an original kind of informal institutional framework : online

communities (OCs).

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Online Communities (OCs)• OCs are « endogenous », spontaneous and informal

institutions generating a new model of inter-individual interaction which extends the traditional models of social networks (SNs) and mass medias (MMs), and partially substitute to those.

• OCs are of various types:– Practice OCs (final markets, ex post)– Experience OCs (final markets, ex ante)– Epistemic OCs (innovation)– Inter-firm and professional OCs (intermediary markets)– Intra-firm OCs (hierarchies)

• However OCs share common features that oppose them to both OCs and SNs.

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3 Contrasted Structures of Infomediation

• Social Networks (SNs)– Information circulates along a spatialized graph structure showing

vicinity links, distant links and clusters.– Strength of weak links (« small world » according to Granovetter)– Attempts to densify SNs through selective (or even « secret »).

communities (civil servants corporations in France, macons).

• Mass Medias (MMs)– One way information flow (point to many) or two-step flow (MM + SN)– Poor differenciation of messages (narrow selection of products).– Almost no feedback (except for statistical information about audience).

• Online Communities (OCs)– Almost no direct inter-individual relationships accross participants.– Indirect relationships through the informational corpus (« blackboard »).– Reverse free-riding: « writing » on the blackboard exceeds « reading »,

requesting quality rating.

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MMSN OC

Infomediation Graphs

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3 Contrasted Types of Social Link• Social Networks (SNs)

– Symmetric roles of agents– Long run intimacy– Links do survive temporary inactivity– Tacit reciprocal obligations– Separate networks depending on the context (work / home)

• Mass Medias (MMs)– Strongly asymmetric roles of the source and the audience– Short run and/or fictitious intimacy (star / fan)– Transfer of attention (TV programs attract audience for advertisement)

• Online Communities (OCs)– Complementary dedicated roles : authors or innovators /experts / novices– Instrumental intimacy (ephemerous + personalized)– Asynchronous relationships mediated through the blackboard– Durable but fragile link to the blackboard

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Instrumental Intimacy

Anonymous Personalized

Ephemerous Market OC

Durable Hierarchy Family

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From « Code » to « Semantics »• In both cases of social networks (SNs) and mass medias (MMs),

information may be considered as a signal:– Meaning of the message is rather easy to decode, whereas trust in its truth

and authenticity is at stake.– Signalling is a « natural » (innate) phenomenon (ecology)– The economics of information is « Shannonian » as it treats information as a

coded signal (principal/agent model, perfect bayesian equilibria in game theory)

• In the case of Online Communities (OCs), information takes a semantic dimension as in a language:– Trust is not a major issue (it may be solved endogeneously), whereas the

very meaning of messages is costly to decode (because of fuzzy formulation).

– Language is an « artificial » (acquired) construct.– The coding is ambiguous and of a symbolic type (links between objects

rather than objects themselves are encoded, Savage Thinking, Levi Strauss).– Meta-representation (especially representation of others’ ignorance) is

essential to the interactive process of collaborative construction of sense.

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Critical Concern: Comparative Performances of OCs, SNs and MMs

• Hierarchies and intermediary markets (OCs vs. SNs)– Better decentralization of decisions (through information

circulation at the lowest level) ?– Better coupling accross hierarchies (Do OCs perform better

than inter-personnal networks) ?

• Final markets (OCs vs. MMs + SNs)– Impact on competition and product differenciation (same

degree of competition with higher diffenrenciation) ?– Better consumption of experience goods ?– Better learning of how to use complex goods ?– Better innovation through interactive interplay of innovators

and users ?

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Brief Summary• Final markets are more and more « assisted » (self-regulated) by experience

OCs, that tend to substitute for MMs and to extend SNs (word of mouth).

• Hierarchies and intermediary markets are more and more challenged by work-practice OCs and transversal professional OCs, that tend to move the firm’s boundary and alter the control of proprietary knowledge.

• The consumer’s production function (Lancaster model) develops, thus transforming the final market into an intermediary market and requesting the emergence of domestic-practice OCs.

• Despite of their diversity (experience, practice, epistemic, files sharing, etc.), OCs are the meeting point of « rationalized » production and « savage » consumption (in Levi Strauss understanding of the term).

• The different types of OCs do share a same pattern of original features, in terms of structure and mechanisms, that oppose them to both SNs and MMs and raises the delicate issue of performance assessment.

• OCs are a new informal institution at the core of the K-economy & society.