TECH TALK: My Mental Model: requires Ecosystems(Part 2)

Debraj Ray writes in his book Development Economics on co-ordination failure:

Pervasive complementarities (the fact that a single individual takes some action increases the incentives for others to take the same or similar action) might lead to a situation where an economy is stuck in a low-level equilibrium trap, while at the same time there is another, better equilibrium, if only all agents could appropriately co-ordinate their actions to reach itAccording to this view, economic underdevelopment is the outcome of a massive co-ordination failure, in which several investments do not occur simply because other complementary investments are not made, and these latter investments are not forthcoming simply because the former are missing!

Adds Chakravorti: Getting an innovation to market requires two thresholds that the innovation must cross on its path to impact. The first occurs at the status quo, the situation that the innovation is attempting to improve; the second is that the new outcome that the innovation seeks to create, where a significant portion of its adopters are made better off. These thresholds share a characteristic that fundamentally captures the way choices are made in an interconnected environment. This is the notion of equilibrium.

The SME technology market as also the rural market suffers from a co-ordination failure. Organisations see the segments on their own and conclude that since no one else is present (or no other services exist), it is not worth their while to enter the segment. Individually and independently, they are all correct. The result is a low-equilibrium situation, one that is not beneficial to anyone, but one which is nevertheless an equilibrium. Life goes on year after year, with a low and slow pace of change.

How does one change the situation? Writes Bhaskar Chakravorti: [A way] into the market is to bring about a multiplier effect by assembling an alternative network. To accomplish this, an innovator devises a business model that is, a value sharing scheme that helps co-ordinate the incentives of players in three interlinking categories: those who enable and add to the benefits of the innovation, those who can distribute it to users, and those who actually benefit by adopting it. The first two categories of players are on the supply side of the network to be created; the last is on the demand side. The purpose, of course, is to synchronize the choices of these players in a mutually reinforcing way.

In other words, all of the problems need to be tackled simultaneously. This requires the creation of alternate ecosystem of entities (or a single co-ordinating entity, as we shall see shortly), each of which moves in tandem with the other, to move the system to a higher equilibrium. This is exactly what both the SME and rural markets need.

Next Week: My Mental Model (continued)

TECH TALK My Mental Model+T

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.