Econ 101: Network Externalities and Switching Costs - or - How I Learned to Stop Worrying and Love the Mac

It all began with an Apple IIe upon which I programed a stupid animation of a duck kicking an egg. Then, in college, my brand new typewriter was immediately mothballed once I was shown the Mac labs in the basement of the dorms. Soon I owned one, then a PowerBook and finally a PowerMac that I bought upon starting my PhD. But it was soon over as economics was entirely PC and switching platforms got to become too burdensome. I was consumed by the evil Microsoft empire and have been a slave to PC ever since even after Macs got better and platform switching become a snap.

Economists call the two things that kept me enslaved network externalities and switching costs. Network externalities are when the value you get from using a product goes up the more that other people use it (and vice versa). So, since I was in economics and everyone used PCs, the value I got from PC usage went up and Mac usage went down. Thus I went to PC. Switching costs are just that, the costs you incur when you switch from one product to another. In my case, some software adjustments will have to be made and, more importantly, I have to retrain myself to do some things that I now do without thinking.

So what happened? Well with increased ease of moving across platforms and with the increased popularity of the Mac (including some of my colleagues) the network externality angle has lessened a lot. Switching costs have diminished as well thanks to USB ports, flash drives and Macs ability to link with Mac or PC networks (like I have at home).

And so it is that I have finally come back home to Mac. I am as giddy as the day I brought my first Mac home (a Mac SE - the IIe was a childhood friend's). Here is a picture of the beautiful little guy. A computer on which I wrote my first e-mail. Ah nostalgia. Anyway, I am now fully committed to making the complete transition over time and you know what? It feels fantastic!

So this, my dear readers, is the first blog post from the new MacBook Pro. Enjoy.

UPDATE: I do have one disappointment: in the old days when I used to start up my Mac, it would smile at me. It doesn't do that anymore...

Beeronomics: Does Supply Create Its Own Demand?

I am a little late to jump on this, but a while back the Oregon Brewer's Guild released figures that showed the volume of beer produced in Oregon has increased substantially. I will outsource the data analysis to Beervana.

This raises an economics question I have asked in a lot of different ways in this blog: why is the brewing industry in Oregon so robust and why can so many brewpubs survive in a market like Portland?

Perhaps it is a set of exogenous 'fundamentals' (in economist-speak): Maybe Oregonians are predisposed to like beer more than others, and want to drink it fresh in a pub because of some genetic quirk. Perhaps the climate is conducive to not only beer consumption but pub crawling. Maybe it is the fact that we are in a hops producing region. I have no doubt that in each explanation one can come up with along these lines lies a grain of truth, but I can also just as easily imagine lots of other places with similar characteristics but which don't have nearly the beer culture we have here.

This leads me to believe more in endogenous explanations than fundamentals. I think palates and pub culture are created not inherent. I think that the early introduction of such places as BridgePort and McMenamins had the effect of starting a small ball rolling that slowly began to get bigger and bigger. In effect, I think that the supply of micro-brewers and brewpubs created the demand for even more. I also think it was important that the beer started as available primarily in brewpubs - that it was hard to find the beer in the stores. This promoted the pub going culture that so typifies Portland and many other Oregon communities today.

This is not a new idea in economics, there are many goods for which demand increases after consumers learn about its presence by seeing it in stores, think the Nintendo Wii - the demand keeps grouting as more and more people experience it.

I think this can also be related to Network Externalities. This is the idea that the value you get from consuming a product goes up the more that others consume it. (Thus the externality - the benefit from one consumer's purchase of a good that accrues to another consumer) Think about telephones, the very first owner of a telephone probably didn't get a lot of value out of it until all his/her friends got them as well.

How do network externalities fit in with the Oregon microbrewer and brewpub scene? Well, for bottlers, the more that consumers buy craft beer in general, the more retailers will be willing to give up shelf space and taps to microbrew. Thus, one person's purchase of craft beer benefits others by making more available to choose from. For brewpubs it is the same story, the more people frequent brewpubs the better the atmosphere and the greater the variety of the beer offerings.

It is also likely that these effects are not proportional: they might have been small to begin with, but may have snowballed as time passed and have reached a type of critical mass that creates a true, unique culture.

So here is the punchline: Portland (and Oregon in general) may have a substantial advantage over other cities as a place to start a new brewery/brewpub despite the fact that there is so much competition. In fact it may be because there is so much competition that Portland is a great place to start a new pub. Just ask Christian Ettinger of Hopworks Urban Brewery which is off to a roaring start. Sometimes a little competition can be a good thing.