A nexus of focused companies glued together by power relationships will replace vertical integration as the prevailing archetype for the firm. This chapter proposes a new theory of the firm and a new approach to industrial organization that is more comprehensive than that of previous authors. The chapter reviews previous research, e.g., Limits of the Organization by Kenneth Arrow; Markets and Hierarchies by Oliver Williamson; Co-opetition by B. Nalebuff.
In Chapter 5 the new economic paradigm for the 21st century—a paradigm that is consistent with the emergence of perfect information—is introduced. This chapter demonstrates that due to the second inevitable trend, in transparency several aspects of mainstream economics need to be revisited. For instance, in transparency the two conditions for a general equilibrium cannot coexist, hence a general equilibrium is not possible. Also, the often-used simplifying assumption of normal distributions is not valid. Extraordinary profits and profit power, in contrast, are being proven to be valid economic concepts. In transparency, interdependence of decision making will turn a group into a network. For instance, an economic aggregate, such as “buyers,” becomes a network. The question is what kind of network. Powerlaw distributions—and powerlaw networks—can provide a new paradigm under certain conditions. These four conditions for powerlaw network dynamics in economic aggregates are derived in this chapter. This is the basis for the economics of perfect information, powerlaw economics.
Looking for underlying drivers to make sense of the present and to foretell the future is a time-tested trick. That is why this chapter (and the book, in various other places) quotes Virgil's Aeneid, a 2000-year-old story about underlying drivers and inevitable trends. Like Virgil's Romans, we are in tempestuous circumstances. Humanity has often found itself in situations of rapid change before. And has learned that, with hindsight, the underlying drivers and the changes they caused were very clear. As largely unforeseen changes roil companies, industries, global economies and financial markets, it is possible to step back right now, in the midst of tumult, and discern the patterns that will later seem obvious with hindsight. Like Virgil, this book has argued that only by understanding the underlying forces can we recognize the source of power within a new era. And only then can we successfully profit from the momentum that these forces create. That is the logic flow of this book. Readers can benefit, right now, from applying this understanding to better anticipate the effects of transparency and to maximize returns for their companies or shareholders, and even to enhance the returns on their own human capital as well.
Interdependent decision making—which results from the emergence of perfect information—will cause new market dynamics. The theory of general equilibrium will have to be replaced by theories that recognize the fast-moving, powerlaw driven, network-like dynamics of groups in perfect information. Strategies based on Wisdom of the Mobs and marketing for the Long Tail no longer apply.
Chapter 1 introduces Profit Power—the ability to retain your own profitability and extract returns from others; and use the leverage that derives from it to orchestrate business relationships and to win over competitors and customers—and asserts that profit power is the key to achieving extraordinary returns. Being best is not good enough. The sources of profit power are called power nodes. This chapter provides concrete examples of how power nodes work to produce extraordinary returns.
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