The Frictionless Paradigm in the Network Economy and Society

There is a major claim in the literature on digital markets (Evans & Wurster, 2000; Tapscott 1996; Litan/Rivlin, 2001; Bakos, 2001) that with the emergence of the World Wide Web, a totally new business environment, approaching the ideal-type of the pure market in microeconomics, is emerging. "One of the major features of the Internet revolution is its potential to make the whole economic system, nationally and internationally, more competitive by bringing markets closer to the economists' textbook model of perfect competition, characterized by large numbers of buyers and sellers bidding in a market with perfect information" (Litan/Rivlin, 2001, p. 315). Lower search costs in digital markets "will make it easier for buyers to find low-cost sellers, and thus will promote price competition among sellers" (Bakos, 2001, p. 71).

The Internet as a whole is conceived as one big open market, in which network communication reduces the transaction costs significantly (especially those related with search costs) and, therefore, it creates a new frictionless market, where every economic agent can find what he needs with very limited costs associated to these cognitive searches and encounters (Evans & Wurster, 2000; Hagel, 1999; Bakos, 1997). It is the web of "organizational plasticity" and the Electronic Business Communities (Tapscott, Ticoll & Lowy, 2000), the era of the communities of consumption, of the empowered consumer and reverse marketing (Bressler & Grantham, 2000; Hagel, 1999; Hagel & Singer, 1999; Levine, 1999; Kelly, 1997).

In the vision in which transaction costs are eliminated, market-like relationships, but networked by cooperative spirit, are going to increase their relevance also in the organizational settings. This development is described by Evans and Wuster (2000) as follows: "The value chains that define a business, the supply chains that define an industry, the customer relationships and brands that define a franchise, and the organization charts that define hierarchy, power, and the boundaries of the corporation are all premised on the 'glue' of information. That glue is progressively melting. The edifices of value chain, supply chain, customers, organization, etc. (all of which are taken as givens in conventional strategy), are progressively deconstructed, breaking up into separate entities busily conducting arms-length transactions" (pp. 5–6).

The Internet economy, according to these authors, is also eliminating the universal trade-off between richness and reach, richness being the quality of the information and relationships available and reach being the number of units of relationship. The trade-off used to be simple but absolute. The business strategy either could focus on rich information-customised products and services tailored to a niche audience — or could reach out to a large market, but with diluted information that sacrificed richness in favour of a broad appeal. Much of business strategy rests on this fundamental trade-off. Now, Evans and Wurster (2000) say the new economics of information is eliminating the tradeoff between richness and reach, blowing apart the foundations of traditional business strategy. The consequence at the governance level of management is huge. Frictionless network-based teams and market relationships tend to substitute hierarchical organizations and economic institutions.

The same intellectual framework is also usually used for predicting the diffusion of a community-based new social order. Since the Internet will lower the barriers of time and space in communication, people will build new communities of interest and new communities of emotions much beyond the limits of their local environment (Rheingold, 1993). These communities, for authors like Hagel (1999), become the basis for the business model of the Internet economy. "The real opportunity on the Internet is not just doing what you have always done cheaper and faster, but instead the real opportunity is to rethink at a fundamental level the business models that you employ on this new platform ... Virtual communities actually started as spontaneous social events on electronic networks ... We believe these spontaneous social events provide the foundation for a very attractive business model" (Hagel, 1999, p. 1).

In this vision, this aggregation and cooperation dynamics of virtual communities provide the ground for a significant power shift, from the company to the consumer, which completely reverses the information flow and the power in brand relationships, due to the new information symmetry and democracy (almost) automatically brought about by the digital network. "We have a strong belief that the network is enabling a different kind of market that we characterize as a reverse market. ... In these reverse market situations, we believe it is about customers finding the right vendors at the appropriate time" (Hagel, 1999, p. 3).

In order to exploit economically these communities of consumers, Hagel and Singer (1999) suggest that companies transform themselves in infomediaries, agents who act on behalf of the consumers for providing them with the information they need, through the collection and the management of all the consumers' data and profiles. This is the point where Hagel and Singer's (1999) argument meets Evans and Wurster's (2000). For the latter authors, the most successful business model on the Internet is the "affiliation" infomediation model, because the information economy eliminates the trade-off between reach and richness strategies, between efficiency and efficacy strategies (both at the consumer and company level) and give competitive advantage to relationships built on trust instead of short-term self-interest. On the digital networks customers are going to have more and more power, just because the interconnectedness reduces significantly the information management costs and generates network externalities. Based on these assumptions, the so-called community business model has been widely applied in Internet projects, both in the Business to Consumer (BtoC) and the Business to Business (BtoB) area, building business models based on communities of consumers and independent infomediary marketplaces.

This network-based idea of economic coordination is also applied to interfirm relationships on the supply chain (Hagel & Singer, 1999). In its most radical version (Adler, 2001), this network-based model of inter-firm relationships envisions a future in which the new governance form ultimately challenges the foundations of the capitalist form of society while simultaneously creating the foundations of a new, post-capitalist form.