Wikipedia:

A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.

One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good — for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. The resulting bandwagon effect is an example of a positive feedback loop. […]

Network effect business examples

Financial exchanges

Stock exchanges and derivatives exchanges feature a network effect. Market liquidity is a major determinant of transaction cost in the sale or purchase of a security, as a bid-ask spread exists between the price at which a purchase can be done versus the price at which the sale of the same security can be done. [*] As the number of buyers and sellers on an exchange increases, liquidity increases, and transaction costs decrease. This then attracts a larger number of buyers and sellers to the exchange.

The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. For example, the Chicago Board of Trade has retained overwhelming dominance of trading in US Treasury Bond futures despite the startup of Eurex US trading of identical futures contracts. Similarly, the Chicago Mercantile Exchange has maintained a dominance in trading of Eurobond interest rate futures despite a challenge from Euronext.Liffe. […]

[*] Niall O&#8217-Connor should report on bid-ask spreads, not just on dollar value of matched bets, when comparing BetFair with its competitors.

Keyword Of The Day: NETWORK EXTERNALITIES

Network externality has been defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes.

Previous blog posts by Chris F. Masse:

• Collective Error = Average Individual Error – Prediction Diversity
• When gambling meets Wall Street — Proposal for a brand-new kind of finance-based lottery
• The definitive proof that it’s presently impossible to practice prediction market journalism with BetFair.
• The Absence of Teams In Production of Blog Journalism
• Publish a comment on the BetFair forum, get arrested.
• If I had to guess, I would say about 50 percent of the “name pros” you see on television on a regular basis have a negative net worth. Frightening, I know.
• You can’t measure the usefulness of a system by how many resources it consumes.

ASKING THE MIDAS ORACLE READERS TO CHEAT ON TYLER COWEN.

DO YOU KNOW THE URL OF TYLER COWEN&#8217-S SECRET BLOG?? IF YES, PLEASE, SEND ITS URL TO CHRIS MASSE. ANONYMITY GUARANTEED. AND I PROMISE I WON&#8217-T PUBLISH IT.

[I’m testing the solidity of the oath taken by the purchasers of Tyler Cowen’s new book —they had to promise not to give out the URL of his secret blog to strangers. By the same token, I’m also testing the power of Midas Oracle when it comes to attracting Deep Throats.]

&#8212-

Tyler Cowen on the Volokh blog:

New books and secret blogs: some results

A few days ago, on [Marginal Revolution], I offered access to a secret blog (over forty posts) to anyone who would pre-order my forthcoming book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist, due out August 2 from Dutton. The deal, which still stands for all, is that the reader need only write an email to [email protected] and tell me they pre-ordered the book. My underlying hypothesis was that blog readers are not always book readers, so why not package a blog with a book? I was surprised by the results:

1. The orders drove the book up to #220 on Amazon.

2. So far no one has leaked the site address, even though hundreds of people (many of them bloggers) have it.

3. Most people sent in proof of purchase, and were keen to have me look at it, even though I did not ask for it.

4. People asked very earnestly whether it was permissible to show the secret blog to their spouse (it is).

5. Some people wrote me long emails, with complex economic arguments, as to why I should give them the blog for free. But they weren&#8217-t willing to simply lie and get the site address.

6. Some people wrote me long emails with instructions and advice as to how to keep the blog secret for a long time, and possible dangers I might face in maintaining that secrecy.

We&#8217-ll see how this progresses. No, we can&#8217-t fund the nuclear umbrella this way, but I am heartened by the honesty and cooperativeness of the blog-reading community.

Tyler Cowen to Chris Masse (&#8221-Do you mention the prediction markets in your new book?&#8220-):

Absolutely I mention them, in the context of discussing Robin Hanson, in the chapter on &#8220-How to Look Good&#8221-&#8230-

TYLER COWEN – Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.

– Vernon Smith to Work on Californian Public Policy

– In Reverse Migration, 4 Economists Lured From the West to George Mason U. Now Head to Chapman U. – Chronicle.com

– NEW LINKS News: Chapman hires Nobel Prize-winner | smith, chapman, university – OCRegister.com + Chapman’s newest hire was tempted by ideal post” + “Today’s editorial: Chapman raises its economics profile”

– NEW LINK: Chapman U. hires Nobel winner and team – Los Angeles Times

– The George Mason University statement

– The Chapman University statement

– The Wall Street Journal take

Previous: Deep Throat on the George Mason University exodus to Chapman University. + All GMU’s ICES faculty except Houser and McCabe are leaving to join Chapman University. + NOBEL LAUREATE VERNON SMITH LEAVES ROBIN HANSON’S GEORGE MASON UNIVERSITY TO GO WORKING FOR TOM W. BELL’S CHAPMAN UNIVERSITY.

– The George Mason University statement

– The Chapman University statement

– The Wall Street Journal take

Previous: Deep Throat on the George Mason University exodus to Chapman University. + All GMU’s ICES faculty except Houser and McCabe are leaving to join Chapman University. + NOBEL LAUREATE VERNON SMITH LEAVES ROBIN HANSON’S GEORGE MASON UNIVERSITY TO GO WORKING FOR TOM W. BELL’S CHAPMAN UNIVERSITY.

UPDATE:

– Vernon Smith to Work on Californian Public Policy

– In Reverse Migration, 4 Economists Lured From the West to George Mason U. Now Head to Chapman U. – Chronicle.com

NEXT: The latest about the departing of Nobel Laureate Vernon Smith from George Mason University to Chapman University

Felix Salmon:

GMU&#8217-s economics department is, famously, full of bloggers. Its chairman Donald Boudreaux blogs at Cafe Hayek with colleague Russ Roberts– Robin Hanson founded Overcoming Bias- Bryan Caplan and Arnold Kling blog at EconLog- Peter Boettke blogs at The Austrian Economists- and, of course, Tyler Cowen and Alex Tabarrok are bona fide stars of the blogosphere with their hugely popular Marginal Revolution. I&#8217-m sure there are more I don&#8217-t know about, too. All of these bloggers are famously unrestrained. GMU&#8217-s economics department is, famously, also home to 2002 Nobel laureate Vernon Smith. (He&#8217-s 80 years old, and a Nobelist, so you&#8217-ll forgive him for not having a blog of his own.) Smith more or less invented the hugely fecund field of experimental economics, and is by far the most important economist at GMU. So when GMU grad student Brian Hollar broke the news that Smith was leaving GMU and taking most of its experimental economics faculty with him to Chapman University in California, it&#8217-s not surprising that the blogosphere immediately started buzzing. Or rather, it is surprising that the blogosphere didn&#8217-t start buzzing: so far, none of the GMU economists has seen fit to mention this news at all. One might almost think that a don&#8217-t-blog-this edict had gone out, either explicitly or implicitly. But certainly the silence is puzzling.

Note: The experimental economics is the ancestor of the prediction markets, one could say.

NEXT: All GMU’s ICES faculty except Houser and McCabe are leaving to join Chapman University.

NEXT: Deep Throat on the George Mason University exodus to Chapman University.

NEXT: OFFICIAL: NOBEL LAUREATE VERNON SMITH DECAMPS FOR WEST COAST&#8217-S CHAPMAN UNIVERSITY.

NEXT: The latest about the departing of Nobel Laureate Vernon Smith from George Mason University to Chapman University

Yahoo! Research does investigate prediction markets &#8212-see David Pennock (the inventor of the DPMM) et al.

MicroSoft Research does investigate prediction markets &#8212-see Todd Proebsting (&#8221-I lead Microsoft Research&#8217-s Information Forecasting Exchange project&#8220-).

Google Research does not investigate prediction markets &#8212-see this interview. (The prediction markets effort at Google is part of the 20% project of a group of managers.)