1

Exploring the Origins of New Transaction Costs in Connected Societies

Andreina Mandelli

2003

Chapter 9 (draft) In (MaijaIn (MaijaIn (MaijaIn (Maija----Leena Huotari and Mirja IivonenTrust, eds) knowledge management and systems in organizationsLeena Huotari and Mirja IivonenTrust, eds) knowledge management and systems in organizationsLeena Huotari and Mirja IivonenTrust, eds) knowledge management and systems in organizationsLeena Huotari and Mirja IivonenTrust, eds) knowledge management and systems in organizations. . . . Idea Group Pub.Idea Group Pub.Idea Group Pub.Idea Group Pub.

Introduction There is a considerable amount of literature in management science, which claims that the digital economy is a frictionless economy, where hierarchies and institutions disappear replaced by dynamic and self-organized webs of companies and consumers, freely meeting on this new web of opportunities (Bakos, 1997; Hagel, 1999; Hagel and Singer, 1999; Evans and Wurster, 2000). The implications of this vision (that here we call the "paradigm of the frictionless Internet economy and society") are huge. It may influence the way managers build market strategies and manage organizations, but also the way policy-makers address relevant issues concerned with the so-called digital divide in the knowledge society (Norris, 2000; Compaine, 2001). This idea is not new. As Agre (2001) reminds us, conservative legal scholars, back in the seventies viewed social progress, teleologically, as the progressive reduction of transaction costs, and thus (they argued) the perfect approximation of ideal markets. But Rullani (1998) warns against this fundamentalist approach to Internet society, because it simply reintroduces the ideology of the invisible hand of the market and social darwinism, against any idea of collective action. In previous works (Mandelli, 2001b) and in this study we have addressed the frictionless vision, challenging the communication symmetry fallacy, on which is based the idea that the network economy is automatically eliminating the information and institutional hierarchies (even though we still believe that the Internet introduces radical changes in the way economic institutions are built and the way businesses are conducted). We claim that the complexity of our interconnected world, the evolutionary nature of trust and learning dynamics, and the economics of mediation (the economics of relationships plus the economics of information infrastructure), play a major role in both the creation and reduction of these new hierarchies in digital society. The result is complex and not deterministically driven by network technology. We challenge the frictionless paradigm, providing primary and secondary research support for the idea that in the digital society and digital economy there still are cognitive frictions and hierarchies. There is evidence about price dispersion and the role of hierarchical brands in digital economy; evidence about the failure of business models based on the frictionless assumptions, data about economic concentration in the Internet industries and infomediation flows, and evidence about social frictions and new social transaction costs in building new relationships on digital webs. Research from different disciplines has already addressed this issue. We try to include these different empirical works in an unitary interdisciplinary framework (using theories elaborated in social sciences, information sciences, management sciences and mass communication research) and provide theoretical explanations for this new idea of the impact of technological networks on society, looking for sources of hierarchies in the complexity of the new social systems, and in the economics of information and economics of cognitive and social mediation. Trust in our study is not seen as an automatic driver of hierarchy reduction in digital society; its role is more complex, since it contributes to both the reduction of old hierarchies and the formation of

2

new ones. We add original empirical evidence supporting the path-dependent idea of the dynamics of trust, using survey data on a random stratified sample of 288 Italian Internet users. Trust builds trust. Bonding social capital drives both new bonding social ties and new bridging (out-of-the-community) relationships. But social capital building requires not only the investment of prior social resources; it also asks for network social infrastructures (diffusion of connectivity services), and for cognitive and time resources. The path-dependent nature of trust dynamics on digital networks is also suggested by the role of values in influencing communication behavior and attitudes. The frictionless paradigm in the network economy and society: information symmetry and network-

based forms of governance There is a major claim in the literature on digital markets (Evans and Wurster, 2000: Tapscott (1996); Litan/Rivlin 2001; Bakos 2001): 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, 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, 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 the "organizational plasticity" and the Electronic Business Communities (Tapscott et al., 2000), the era of the Communities of consumption, of the empowered consumer and reverse marketing (Bressler and Grantham, 2000; Hagel, 1999; Hagel and 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. "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" (Evans and Wurster, 2000, 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. Your 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 trade-off 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

3

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, 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, 1999,3). 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 (1999) argument meets Evans & 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 the 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 inter-firm relationships on the supply chain (Hagel and 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.

Challenging the frictionless paradigm The frictionless vision of the network society surely grasps the novelty and disruptive character of the Internet communication models and their impact on the economy, but we believe it doesn't come to terms with the complexity of the Internet society, its economics and its changes. We need a more fine-grained analysis of these changes, trying to understand more precisely the nature of these new forms of governance and their new hierarchies (Mandelli, 2001b) We claim that the frictionless paradigm doesn't describe the complexity of the Internet society because:

1) It's not true that network connections automatically drive information symmetry and power-shift in relationships;

2) It's not true that network connections automatically create social cooperation and relationships based on trust;

3) It's not true that relationships based on trust are necessarily non-hierarchical.

Trust, delegation and legitimacy

4

Delegation is a tool for managing complexity in complex systems. In Castelfranchi and Falcone (1999) trust means delegation. This is why, differently from what it is true for the majority of scholarly definitions of trust (Castaldo, 2002), we propose to focus on what the trustor misses, instead of what he chooses. He misses variety. The trustor gives up power, when he gives up the exploration of potentially better alternatives of cognitive mediation. At the system (or sub-system) level delegation is the structure of power relationships in the system. So trust can drive cooperation but this doesn't necessarily mean that trust lowers relationship hierarchies. Trust is not the opposite of hierarchy because trust is a form of hierarchy (cognitive selection). But it is also variation. All cognitive hierarchies are at the same time selections (delegation, reduction of variation) and increase in variation (symbolic value added by cognitive mediations and new associations). Mediation and delegation are not the same concepts, even though they are connected. Mediation focuses on the constructivist value added by symbolic interaction in the cognitive and social encounters. Delegation focuses on selection and complexity reduction. If we analyze the infomediation role of trust, we can more easily understand its relationship with delegation and power (Mandelli, 2001). Weber (1919) defined power as "the possibility of imposing one's will upon the behavior of others." In later studies (French and Raven, 1959), power explicitly includes the ability to influence values and beliefs. French and Raven (1959) define power as the ability to influence others to believe, behave, or to value as those in power desire them to or to strengthen, validate, or confirm present beliefs, behaviors, or values. But power is not all the same. Since Weber's work on legitimacy (1919) the source of delegation has been one of the core research questions in social studies. Coercive power is based on the threat of force. Force is not limited to physical means; it is also social, emotional, political, or economic. We know that delegation (opposite to coercion) can be based not necessarily on tradition and charisma, but rather on shared rules and professional specialization. Weber defined authority as the "means by which dominance was cloaked with legitimacy and the dominated accepted their fate." Legitimacy can be based on charismatic affect, tradition, or legal/shared rules. Also according to French and Raven (1959), power manifests itself in several forms; among these are: expert power, reward power, legitimate power, referent power, and coercive power. In their stricter definition legitimate power results from one’s being appointed to a position of authority. Such legitimacy is conferred by others and this legitimacy can be revoked by the original granters. Referent power is the affective tie to one's community or group. Expert power is based on the idea that experts are in a better position for selecting the best solutions for the collectivity. In Morris (2001 "something is legitimate if it is in accord with the norms, values, beliefs, practices and procedures accepted by a group." (p. 2) In his perspective legitimacy is not concerned with self-interest. "... the legitimacy of any feature of a social structure is indicated by the fact that it is supported by those who have nothing to gain from it, even by those who would benefit from some other structure" (p.5) These ideas on how human communities legitimate power and delegation are crucial for understanding how democratic institutions can be built on power asymmetries and delegation. Representative democracy government mechanisms are based on delegated decisional power. It may be important also for understanding the legitimacy of coordination of social asymmetry and infomediation. According to Schudson (1973) the shared rule and professional type of delegation is the way news media legitimate their gatekeeping role in society. News values (Gans, 1979) define the professional and the social responsibility rules of the game. Complexity in this case is managed by delegated selection; selection is based on negotiated agendas at the policy level and shared social-responsibility rules (McCombs et al., 1997; Semetko and Mandelli, 1997). In this view cognitive and cultural hierarchies (information and value delegation) come out from professional delegation and civic trust. Symbolic coercion (authority non legitimated) comes from the information divide, based on the differential access to the gatekeeping system, influenced by economic, cognitive, and social resources (Mc Combs et al., 1997).

5

In our digital society the sources of information are multiplied and more difficult to select. Different kind of new infomediaries on digital networks have entered the scene (in particular portals and virtual communities). These higher-level social actors have different agendas and value priorities. We must understand the logics of these new cognitive policy arenas in digital societies and economies. This goal is too broad to be addressed in this work. Here we focus on one of its core components: the role of trust in delegation and cooperation.

The symmetry fallacy, the new transaction costs and the economics of mediation We argue that the reason why the dominant intellectual framework in Internet economics doesn't help face the challenges of management in complex digital networks is because it is based on what we call "the communication symmetry fallacy" (Mandelli, 2001b and 2002b). This is the idea that technological symmetry between all pairs of nodes in digital networks (the potential total connectivity provided by the digital infrastructure of networks) create a cognitive and relational symmetry in the same pairs of nodes. It is the old "communication as transportation" metaphor, critiqued in mass communication research (Carey, 1989), now applied to the networked world. As mediations are not simply content channels, relationships are not automatic. They are context-based and are the outcomes not only of choices, but also of inertia, randomness and learning (Nelson and Winter, 1982; Dimaggio and Powell, 1991; Macy, 1998; Rullani and Vicari, 1999; Castelfranchi, 2000). Choices can be instrumentally and not instrumentally driven (Castelfranchi, 1998), but they are not "order for free". They cost technology, information, trust, values, attention and time resources at the node level, even when the cooperation between those pairs of nodes is self-organized/ not coordinated centrally (Mandelli, 2002). Friction-free relationships and friction-free markets are not more common on the digital web than in traditional communication spaces, because transaction costs at the node-level on digital networks are not eliminated, they are just changed. For the particular cognitive logistics of the Internet (Mandelli, 1997; Mandelli, 1998), it can be easier to reach out somebody (once we know where to look for) and switch from him to another partner, but it can be much more difficult, though, to establish an efficient and long-lasting relationship, considering the complexity of these dynamic encounters, their uncertainty, and the cognitive and social resources we have to bring into (Mandelli, 1998; Jarvenpaa and Leidner, 1998). The communication symmetry idea doesn't take into account the complexity of social and cognitive networks we are creating thanks to the technological web, and the individual and system-level need for new hierarchical (though dynamical and flexible) structures of selection and delegation, made of different layers of dynamically interconnected cognitive worlds (Mandelli, 2001). The availability of a technologically frictionless communication channels doesn't increase automatically information and relationship variety for social mediation. We reduce our access to diversity in relationships because of cultural inertia (Dimaggio and Powel, 1991) or according to our need of economizing on cognitive investments (Neuman, 1991; Mandelli, 1997b and 2002). But we also reduce our access to diversity because of the information asymmetries structured by the economics of infomediation and content (Neuman, 1991; Mandelli, 1998; Shapiro and Varian, 1998; Vicari, 2001). But if network society is not the all symmetrically connected society that the new frictionless paradigm envisioned, it is also very different from the only-locally connected societies of the past. If societies are communication networks, the structure of the network matters. Digital communication provides a different infrastructure and structure to our network society. If we study Internet relationships using the approach suggested by connectionism applied to virtuality (Vicari, 2001), we can recognize new hierarchies at the level of the structural architecture of connections, at the level of the stock of resources available to the individual nodes in relationships, and at the level of the connection activation mechanisms (Mandelli, 2001).

6

We can easily grasp this, applied to the so-called digital divide problem in the network society (Norris, 2001; Dimaggio and Hargittai, 2001; Cawkell, 2001). People have access to the technological connections of the new social network (they become Internet users) depending on their social and cognitive resources (technology adoption, education, computer literacy). Researchers call this the first dimension of digital divide (Norris, 2000). Also, they have access to the information and the relationships on the network, depending on their ability to reach (technologically and cognitively) content and other people and being reached by content and other people. This content and relationship access (the "democratic divide" in Norris, 2000) is limited by the infomediation/gatekeeping systemi and its business model (figure 1, Mandelli, 2001). A general portal is less precise than a specialized navigation service. A walled-garden portal like AOL limits more the options and the diversity of navigation sources than the other types of portals or free navigation on the World Wide Web. But this access is also limited by users' language, and users' stock of available tangible (money) and intangible resources (attention, time, cognitive sophistication, social capital).

Infomediary

= Technological connection

= Communication connection

Content

Content

Individual

Cognitive

network

Individual

Cognitive

network

Individual

Cognitive

network

Individual

Cognitive

network

Content

Individual

Cognitive

network

Tech divide

Content

Tec

h di

videInfo access divide

Democratic divide

Figure 1 Hierarchies on the network - source: Mandelli, 2001 The infomediation structures on digital networks can be very different (Mandelli, 1999); they can be very complex (different distributed layers and actors of infomediation, all connected by hypermedia rings of collaborative services) or very top-down and simple like in the walled-garden model. They respond to specific functions (trade-off between cognitive efficiency and diversity access for the user) and have different legitimacy for their gatekeeping role (Mandelli, 2001). Besides accessing the content differently, Internet users can also interact with content and people differently, depending on whether the formats of the channel and the medium are designed to allow interactivity, but also whether they are able and interested in doing it, according to rational and non-rational rules of activation. Each elementary and second-level node on the network faces transaction costs (costs of cognitive mediation) when they activate connections with other nodes and sub-systems. These transaction costs are made by all the resources invested in the symbolic mediation:

7

• Monetary cost of connection (if the infomediation infrastructure is not based on free-connection business models)

• Time

• Attention

• Knowledge

• Social capital

• Freedom (privacy) Knowledge is to be conceived both as cognitive sophistication (education and technological literacy for individuals) and cognitive frameworks. Social capital is defined in Putnam (1993, 167) as those "features of social organization, such as trust, norms and networks, that can improve the efficiency of society by facilitating coordinated actions." All the intangible resources produce costs, even though knowledge and social capital are subjected to the law of increasing returns (Shapiro and Varian, 1998), meaning that their value doesn't decrease with the use. Knowledge and social capital don't devalue with the use, but they require often huge investments to be built, that is they create sunk costs. Networks still have sunk costs at the node level, but these sunk costs are different than before; they are mostly based on intangible investments. We know that sunk costs drive lock-in strategies (Shapiro and Varian, 1998) and this is one of the major sources of hierarchy on the social and economic networks. More in general, the new transaction costs have the following sources:

• The cognitive complexity of the increasingly interconnected system;

• The economies of scale (supply side and demand side) and scope in the information production;

• The tangible and intangible resources required for accessing the content and the infomediation infrastructure of the network;

• The tangible and intangible resources requested by the relationships with the connected nodes.

New hierarchies in the network society

Since the spread of the frictionless paradigm in Internet research, few authors have disputed its major claims from different fields (Shapiro and Varian, 1998; Porter, 2001; Norris, 2000 and 2001; Mandelli, 1998 and 2001b), even though not in a unitary framework. The core argument of the frictionless paradigm is the idea that the Internet eliminates transaction costs and communication asymmetries. If we challenge the idea that the Internet eliminates transaction costs and asymmetries, we seriously cast doubt on the entire frictionless paradigm. In this work for economic paradigm we intend (as in Rullani, 1998) a coherent abstract system of technology, organizational model, type of marketing and labour relationships; "an abstract framework that theory can build and practice can use ... an intelligent reducer of the social and natural complexity, which is selected by a cognitive filter that drives it toward the production of value. ... a kind of collective intelligence." (Rullani, 1998, 30). We accept the call in Rullani (1998) for challenging the fundamentalist answer to the crisis of fordism, which mixes a naive mythology of digital revolution with social darwinism. Citing Habermas he reminds us that this fundamentalism "... which is nurtured by technology and nature laws, is in search of a program of technological transformation driven by the force of self-organized systems, with abdication of the political power and the sacrifice of collective action. It is only apparently a liberal form of post-fordism; actually it is an authoritarian form ... because, without the old constraints, the new dynamic technostructures and the interests which lead these social transformations can easily dominate all the others." (p. 27). For achieving this goal we need to clarify what we mean with the term hierarchy. In this work we use three ideas of "hierarchies":

8

• The first one is strictly linked to the idea of information asymmetry, the unequal access to relevant knowledge by relational parties; relevant for this study is the unequal access to both diversity and richness of information;

• The second one is the idea of power asymmetry in dyadic relationships, based on selection and delegation (when people explicitly, even though not always because of their willingness, give up variety options in their content and social encounters, even if they have access to them);

• The third one is, at the network level, the more complex idea of organizational hierarchy, as the governance institutional alternative to the market form of coordination, in the transaction-cost theory approach to organization (Williamson, 1975).

The not-so-frictionless digital economy

Research extensively found that relationships between consumers, relationships between companies and relationships between companies and consumers in the digital economy don't follow the patterns predicted by the frictionless model of the Internet economy, both in BtoC and BtoB markets. As we are going to review in the following paragraphs, there is solid evidence that:

• Inter-firm networking has demonstrated to be constrained by cultural and social frictions;

• The community business model in e-commerce has proved widely unsuccessful both in BtoC and BtoB;

• Information and organizational concentration has demonstrated to be an important competitive lever also in the digital economy;

• Price discrimination in digital economy has been found, supporting the idea that brands have a differentiation role also in the uncertain territories of the Internet markets;

• The establishment of new relationships on digital networks requires the investment of relevant cognitive and social resources.

These results may be interpreted as the support to the idea that the Internet is "business as usual". Here we try to bring theoretical support and evidence for the opposite view. The Internet diffusion does indeed call for a change in business management and marketing paradigms, but in a different (and more complex) way than it is predicted by the frictionless and reverse-marketing vision. We claim that in the Internet economy there are different kinds and degrees of digital hierarchies, because there is not easy and equal access to knowledge, because there still are transaction costs and social resource scarcity, and because organizational concentration in the content and infomediation activities still matters. The sources of the new hierarchies are to be found just in the network nature and economics: the economics of content and gatekeeping (infomediation), the cognitive logisticsii of the web, the increasing complexity of social networked systems and the economics of individual cognitive mediation and selection (bounded rationality and bounded sociability).

Hierarchies in the inter-firm networks Adler and Kwon (2002) propose to go beyond the dicothomy between the market and the hierarchy organizational concepts, in the study of post-capitalism. In their vision networks are not just hybrids, they are a new ideal-typical forms of organizing, with its new corresponding coordination mechanism: trust. Several authors predict that dynamical network-based organizational forms will replace hierarchical organizations (Saxenian, 1994; Fukuyama, 1995 and 1999; Adler, 2001; Adler and Kwon, 2002), in a world where complexity makes fixed contracts and hierarchical ties incapable to address the growing need to adapt to environmental changes, and technology offer easier way to build dynamic connections. We address this issue more in depth in Mandelli (2003). Here we focus on empirical

9

studies that provided evidence challenging the idea that technological networks can easily and almost automatically transform in network-based coordination. In the BtoB Internet world, vertical e-marketplaces managed by independent infomediaries were assumed to become the new network business model (Bakos, 1998; Kaplan and Sawhney, 2000). It is widely recognized now that the main reasons why these open network-based marketplaces have failed were their inadequacy to deliver a superior value proposition to the members, and a lack of a legitimated and trusted system of knowledge-sharing (Grewal et al., 2001; Devine et al., 2001¸ Hoffman et al., 2002). In Grewal et al. (2001) study on a vertical e-marketplace in the jewelry industry, the researchers applied the motivation-ability framework (Merton, 1957) to inter-firm cooperation, and found that motivation to cooperate was both efficiency-driven and legitimacy-driven (as also suggested by the new-institutionalism theoretical framework, see DiMaggio and Powell, 1983). None of these expectations were met. The new supply-chain collaboration formulas (in which the incumbent players orchestrate the networks) have proved more successful (Hoffman et al., 2002): Devine et al. (2001) report that though buyers can shop for a better price elsewhere, they have found that they are rarely inclined to do so and prefer private exchanges. Customer relationships built on trust (and supported by nondisclosure agreements) are essential for knowledge sharing (for example if suppliers have to monitor a customer’s sales and inventory levels, to forecast product demand, and to assure the delivery of goods or services as needed). Also McDuffie and Helper (forthcoming), in their study of global Internet consortia, found that social interaction patterns (different by company history, country, laws, institutions, geography and resources) have been critical variables in these network projects. These new networks are not "business as usual" but neither frictionless webs of relationships. They provide a completely new, more efficient and richer, communication environment to previous economic communities, consolidated by accumulated knowledge and trust. One lesson that we can draw from this experience is that managers cannot build communities in laboratory; they emerge historically from the complex dynamics of relationships in industries and society. Also Internet business networks are built on frictions. Communities are built on social capital and willingness to share knowledge, and these two assets are not readily available. Institutions emerge when they offer to all the economic actors added value compared to the alternatives. In this case, open community-based value networks failed to deliver higher value to the involved nodes than it was possible through more hierarchical organizations. Social capital is the relative advantage of the new hierarchical formats; the cost of building trust was the transaction cost (and the main reason of failure) of the previous open formulas. This phenomenon can be better understood using the conceptual tools offered by the research on the role of trust in building competitive advantage in post-fordist economies (Barney and Hansen, 1994; Vicari, 1995; Costabile, 2001; Busacca and Castaldo, 1996) and the literature on social inter-firm networks (Grandori and Soda, 1995; Kogut and Zander, 1996; Koka and Prescott, 2002). Trust, in the resource-based view of management, is considered one of the intangible assets of firms, which build on it for achieving differentiation and sustainable competitive advantage. It works as strategic (and not-easily-replicable) asset just because it is not readily produced. Also the organizational network literature provides support for the idea that social capital is not an easy-to-build asset. Koka and Prescott (2002) define social capital, in organizational contexts, in terms of the information benefits available to a firm due to its strategic alliances. Using longitudinal data on the population of strategic alliances formed during the period 1980-1994 by firms in the global steel industry, they provide evidence that social capital yields distinctly different kinds of information benefits in the form of information volume, information diversity and information richness. But these benefits are different because the distribution of social capital is not equal. Networks are not all the same. Not all the members of a network are the same. Some members are more equal than the others. The resource-based approach (Barney and Hansen, 1994) has had a significant impact on how we see the way firms leverage their resources and capabilities, in particular knowledge and social

10

resources, for building competitive advantage. The emergence of intangible resources as a major component of firm capital, often overshadowing traditional capital (Barney and Hansen, 1994; Vicari, 1995; Costabile, 2001; Busacca and Castaldo, 1996) has contributed to refocusing strategic management on organizational advantage (Nahapiet and Goshal, 1998). The firm has been therefore redefined as “a social community specializing in speed and efficiency in the creation and transfer of knowledge” (Kogut and Zander, 1996). The trade-off between market and hierarchy, is illuminated by a new perspective. The reason why organizations emerge is not to leverage tangible resources anymore, but rather to leverage the intangible unique sources of competitive advantage: knowledge and social capital. This approach to institution formation can be applied to both firms and networks. Even in the over-studied Linux case (Browne, 1998; Axelrod and Cohen, 1999; Moon and Sproull, 2000) of open-source and distributed software development, researchers found that the project was working because it was based on specific and not-generalizable resources: a natural community with strong commitment (what can be more affectively motivating than the goal to outperfom Microsoft's operative system?), trust and diffuse expertise. Also speaking about organizational social ties we can fall in the symmetry fallacy we have already described for information flows, when we take a technologically deterministic stance. Technological connections don't necessarily create social connections. Network-based relationships don' t simply stem from technological connections. They are output of choices, but also socially and culturally emergent phenomena. Their structures are influenced by the history of prior relationships and the stock of available social resources. In Adler and Kwon's (2002) perspective "Social capital is the resource available to actors as a function of their location in the structure of their social relations" (p. 18) Networks are not cost-free coordination formats. We can consider social capital as both a cost and a benefit of relationships (Adler and Kwon, 2002). It is a cost because it requires investments but also "it needs maintenance" (Adler and Kwon, 2002, 22). Networks have coordination costs, which stem from the organizational complexity of these new forms of organizing (Gulati and Singh, 1998). Network formation is a path-dependent, evolutionary process, and trust can help diminish transaction costs only after a complex and long history of social investments (Lorenzoni and Lipparini, 1999). Also, social capital in networks can create frictions and inertia, instead of liberating creativity and innovation. Local cultural and social forces can hamper the ability of networks to go beyond the originally local base, in search of optimization coming from the diverse and global reach of the new technologically connected networks (Powell et al., 2002). Tsai's (2000) study shows that also in intra-organizational networks, prior network centrality, trustworthiness, and strategic relatedness significantly affect the rate of new linkage creation and network structure. One of the examples often used to show the relevance of the network-based model of inter-firm governance is the "local distretti" form of organizing of the Italian small companies (Saxenian, 1994). These local network-based industrial systems are characterized by flexibility but also by the ability of adaptively learning in a cooperative context. But in these network-based systems relationships are not symmetrical (Grandori and Neri, 1999; Brown et al., 2002; Dagnino and Padula, 2002), and cooperative learning is complemented with control and command, reproposing the old role of the bigger and more powerful firms in the construction of new dynamic networks in local and global economies (Gottardi, 1998). The structures of networks evolve and change over time, and they can be designed and managed by network leaders (Lorenzoni and Lipparini, 1999). Technological diffusion increased the geographical outreach of the networks originally only local but this also increased the importance of the local leader firms and their role in leading vast networks of smaller and subordinated firms (Gottardi, 1998). This system integrates competition and cooperation, but "it is governed by the leaders" (Gottardi, 1998, 142). Also the cases of wide global networks of smaller firms organized by powerful orchestrators as Nike and Cisco (Brown et al., 2002) confirm this highly hierarchical option of network-based governance forms. The hypothesis that networks drive almost automatically cooperative behavior

11

doesn't correspond to empirical evidence. Studying the importance of the relational dimension of inter-firm exchanges, Wathne et al. (2001) found that interpersonal relationships between buyers and suppliers serve as a switching barrier but are considerably less important than both firm level switching costs and marketing variables. Gulati and Singh (1998) found that previous social ties reduce coordination costs and the need for hierarchical control, but they also found that reciprocal interdependence (we can call it complexity of the system) increases need for coordination hierarchy. In short, networks are not simply a more democratic and socially rich alternative to hierarchies, coordinated through trust instead of price or authority. They include elements of markets and hierarchies, and are coordinated through different control mechanisms: prices, trust and authority. Control mechanisms require investments at the node level and at the social level. The real novelty of networks doesn't seem to be the differential degree of hierarchy, but the differential degree of interconnection (complexity) and flexibility (dynamism of connections) of the systems. This is consistent with the recent call of researchers (Dagnino and Padula, 2002) for studying the interconnected (and not dichotomical) role of competition and cooperation in networks. They suggest rebalancing the focus of research attention, in order to study the "variable-positive-sum game" and the potentially "unfair" nature of the network mutual exchanges (Dagnino and Padula, 2002).

The concentration in the content and infomediary industry: the new gatekeepers According to Shapiro & Varian (1998), the economic impact of the Internet and corporate computer networks is similar to that of earlier networks such as the railways, telephones and bank machines. The authors claim that ''information rules'' are simply more radical versions of the rules that have always applied to high-fixed-cost, low-marginal-cost industries. Information industries in general -- Media companies, Internet companies, software companies-- all have in common the combination of high ''fixed costs'', low ''marginal costs'' and ''network externalities'' (the more people use the network service the more people will find it worth using it). This generates huge economies of scale at the supply side (economies of scale in the production and distribution of information - the so-called first-copy economies in Neumann, 1991), and at the demand level (benefits for the individual members of the network are dependent on the size of the network itself), as well as huge economies of scope (the more the same customer buys from you the less is the unitary cost of your relationship with her). The rules of the information economy, plus the scarcity of the attention resources at the node level (their bounded rationality), drive market concentration, not distributed market power. This information economy creates not only emergent information hierarchies but also explicit strategies for controlling the navigation options and information diversity accessible by customers. Price discrimination, product versioningiii and lock-in strategiesiv (though hurting the interests of the customers because they reduce their access to diversity), generate higher profits for the company. The world of the information economy, from this standpoint, is made by huge corporations and trapped customers. The result can be a second-level digital divide: a "democratic divide" (Norris, 2000). "Small foundations and educational institutions simply can not compete with the vast production budgets of major commercial portals like Yahoo and Excite. Further, if people want to find such non-commercial spaces, they may find it difficult due to search engines that steer people to the continually growing number of commercial web sites." (Neuman et al. 1999). This drive toward concentration is accelerated by the more diffused business model on the net: the advertising-based business model. Since the infomediaries (portals of all sorts) need advertising revenues, they tend to build big audiences and this - along with the economies of scale - makes the competition for shares of web traffic very intense. On the other side, the economies of scope and the business models based on affiliation commercial agreements drive the development of the so-called "walled-garden"

12

model of the information assortment. This means that the big portals tend to reduce the number of information sources accessible and to control the rules of search results in order to respond to the expectations of commercial partners (big manufacturing firms, retailing and information brands on the net). The resulted concentration of what we call the "activated navigation options" on the World Wide Web is clear from the following chart (figure 2). It refers to the distribution of the total attention invested by the users on the web in Europe, measured in monthly usage minutes.

Number of web usage minutes per month, by

number of companies to which usage is

attributable - Europe (Jupiter, 2001)

0

20

40

60

80

100

120

March 1999 March 2000 March 2001

50% of all minutes

60 % of all

minutes

Figure 2 Concentration in European Internet infomediation Online consumers respond to overload of information by dedicating their attention to a very limited fraction of online shops. They select and give up diversity. Netratings in September 2002 calculated that the average Internet user accesses only 49 domains in a month. We know that the number of available domains on the web were more than 36 million already in 2001 (source: Coley consultancy, 2002) This doesn't sound new for students of mass communication. From media economics we know that information economies drive concentration. This is true for the interactive networks as it was true in the old content and information industries (Neuman, 1991). We also add another reason, often disregarded, why we should be aware of the potential increase of economic concentration, specific to the era of the Internet; we first studied this phenomenon applied to marketing (Mandelli, 1998). The Internet not only decreases connection costs. It also decreases coordination costs. Digital technologies not only foster the efficiency of cooperation processes (knowledge conversion through electronic socialization), they also increase the efficiency of the explicit and codified forms of knowledge conversion (Mandelli, 1998): knowledge externalization and re-combination using Nonaka and Takeuchi's (1995) words. It is like to say that, if it is true that the Internet technology reduces the transaction costs concerned with the distant and dynamic cooperation (therefore fostering the market-type coordination of the interdependencies), it is also true that it reduces the cost of organizational hierarchy-based coordination based on structures and standards of infomediation. The trade-off that generates new institutions doesn't disappear. It moves at a new and lower absolute cost level. This helps also explain why the predicted disintermediation on the Internet is not in sight. Carr (2000) writes that like many of the early assumptions about electronic commerce, this one has proved "laughably wrong." It is now becoming clear that business is undergoing precisely the opposite phenomenon - what Carr (2000) calls "hypermediation". Transactions over the Web involve all sorts of intermediaries, not just the familiar wholesalers and retailers, but content providers, affiliate sites, search engines, portals, Internet service providers, software makers, and many others (Mandelli, 1998). And it is these middle men that are capturing most of the profit (Carr, 2000). You could easily imagine this outcome of the Internet changes, if you studied the

13

different but contemporary changes in transaction costs and coordination added value for both distributed-direct relationships and for hierarchical and intermediated links brought about by digital network technologies (Mandelli, 1998).

Brands as hierarchies The frictionless vision of the digital economy tends to focus on the elimination of the information frictions, and predict a cooperative, dynamic, network-based coordination, without studying in more depth the real role of trust. In this vision, trust is seen as automatically linked to cooperation and symmetry in relationships, whereas we propose to consider the role of trust also in building relational hierarchies, when power in the relationship is asymmetric, as it happens in brand relationships. Shapiro and Varian argue against the idea that brands will be replaced by perfect competition. "Visionaries tell us that the Internet will soon deliver us into that most glorious form of capitalism, the friction-free economy ... we agree that the Internet will make shopping easier than ever, but much of the talk about friction is fiction. (Shapiro and Varian, 1998, 142) Frictions are embedded in buying history and switching costs. They write: "You don' t have to drive to the store to order a new computer, but your choices for the future will still be hemmed in by the selections you made in the past. Like it or not, in the information age, buyers typically must bear costs when they switch from one information system to another. ... When the costs of switching from one brand of technology to another are substantial, users face lock-in. ... Lock-in can be a source of enormous headaches, or substantial profits, depending on whether you are the one stuck in the locked room or the one in possession of the key to the door." (Shapiro and Varian, 1998, 143) Porter (2001) starts from another perspective. He doesn ' t study the specific rules of the information economy, even though he ends up admitting that the Internet can increase competition and challenge competitive advantages based on traditional sources of market differentiation. But what he doesn't accept is the idea that in this new turbolent economic environment firms do not have opportunities for differentiation. Unique products and unique brands will have the same power (if not more) as they had in the past. Research efforts have found support for the idea that there are lock-ins and information hierarchies at the brand-consumer relationship level, in digital economy. According to Reicheld and Schefter (2000), who studied consumer behavior in this new marketspace “price does not rule the web, loyalty does” (p. 106). Several studies have tested the hypothesis of perfect price competition on the Internet (Smith et al., 1999; Brynjolfsson and Smith, 2000; Pan, Ratchford and Shankar 2001; Chen and Hitt, 2001; Johnson et al., 2000; Latzer and Schmitz, 2001; Ancarani and Shankar, 2002). They found that price discrimination and the role of brands in market relationships were very similar on the Internet as in the traditional markets. "... several studies find significant price dispersion in Internet markets. This price dispersion may be explained by heterogeneity in retailer-specific factors such as branding and trust, retailer efforts to build consumer lock-in, and various retailer price discrimination strategies" (Smith et al., 1999, 26). Lack of trasparency might be not the only source of price dispersion; people might be easily willing to spend more money for the same product, even though perfectly informed about the alternatives, if they invest in a branded relationship, trusting the company about future differences. Brynjolfsson and Smith (2000) write: "In light of both existing theory and the earlier results on price levels and price changes, the dispersion in posted prices is surprisingly high. ... At the same time dispersion in weighted prices is lower on the Internet than in conventional outlets — reflecting a dominance among certain heavily branded retailers. Given these findings, we analyse potential sources for the high degree of price dispersion on the Internet. We conclude the Internet price dispersion may arise from two different sources of retailer heterogeneity: heterogeneity in customer awareness, and heterogeneity in retailer branding and trust. We also note that, far from being equalized, these differences among sellers may be amplified on the Internet as compared to conventional channels." (Brynjolfsson and Smith, 2000)

14

These results are particularly important because they come from studies on products considered homogeneous, like books and CDs (we believe that the same study applied to more complex products would have found even higher price dispersion). But this also may support the idea that in a relationship economy the source for differentiation doesn' t come necessarily from the core product, but rather from the service that surrounds it (Mandelli, 1998). Research results from Lynch and Ariely (2000) and Shankar, Rangaswamy, and Pusateri (2001) support this hypothesis, since they found lower price sensitivity on the Internet when more information is offered. Rajgopal et al. (2000) found that the quality of user experience can build a relationship competitive advantage. In an experience economy (Pine at al., 1999) what we buy is not the product but the complex experience associated to this buying behavior. If so, it is even more difficult to predict a perfect competition in the Internet markets, since an interactive environment makes the task of building complex services and experiences around simple products easier than before (Mandelli, 1998). Amazon doesn' t compete on books. It competes on the quality of their services, and on the sophistication of the user experience on their web-site (ease of navigation, personalization services, feedback from the readers, etc.). Latzer and Schmitz (2001) give the following examples for providing evidence for lower than expected market transparency:

1) Search engines cover only a small fraction of web-sites (0,03% according to Bergman, 2001) and e-commerce companies have means to manipulate the perception of the search results (Sullivan, 2001);

2) This is the reason why the traffic is very concentrated (they provide data for the Austrian market similar to those provided in the previous paragraph of this chapter;

3) Consumers tend to search very few shopping-sites and the fraction of shoppers that stop their search after the first site visited is high (Johnson et al, 2000);

4) The most important criterion for consumer choice in BTOC e-commerce is brand name not prices (they provide primary evidence from a survey conducted on a national sample of Austrian users and meta-analytical research data supporting this hypothesis).

Brynjolfsson and Smith (2000) warn that unexpected (and contrary to frictionless hypothesis) results could be due to the immaturity of the Internet markets and easily change in the future. We tend to not agree. Even though it could happen that shopping bots and distributed intelligence in the market will diffuse and make prices more transparentv, it is not likely that brands will become less important, since the source for differentiation and cognitive hierarchy (the need to shortcut in complexity and the need to trust somebody in the light of an uncertain future) doesn't. Trust in brands is the major driver of infomediation selection on the web, along with trust in social ties. Using data from the World Internet Project surveyvi on a sample of Italian users, we found that - when asked what influences their choice of information sources on the Internet - 36% of them answered that they choose information sources based on their reputation; 34% use the same source they use offline; 31% is influenced by word-of-mouth. These data confirm the importance of both cognitive and social hierarchies (delegations) in managing complexity on information-overloaded digital networks.

Relationship changes in digital economy Even though we have found support for the idea that there are information, power and organization hierarchies in digital markets, we don't think this should be interpreted as the proof that the Internet didn't disrupt the traditional way of doing business. Digital marketing is not a reverse marketing, but it is neither traditional marketing. Porter's contribution (2001) to the debate helps give up simplistic ideas about the irrelevance of differentiation in the new network economy, and re-focus on the importance of making the right strategic choices when facing the relevant economic trade-offs. But these trade-offs are different than before. We need to understand how we can create this uniqueness in the new economic and

15

technological context. What is dangerous from a theoretical and practical standpoint is the risk that we fall in a sterile contraposition between two equally useless views of the Internet economy: "the frictionless idea" and the "business as usual" mind-set. We also find that Shapiro & Varian gave an invaluable contribution to the study of the information economy rules, but they perhaps focused too much on the information side of the digital economy and overlooked the other side of the economics of mediation: the relationship side. The network economy is an infomediation/content economy but also a relationship economy. There are new relationship costs and benefits to consider, and new trade-offs to evaluate. A relationship economy perspective could help explain for example why network externalities do not always operate in large communities. Network externalities don't depend on the size of the network (number of members functionally connected) but on the size of the participating members (Mandelli, 2001, Grewal et al., 2001). We claim that information rules are not enough to guide action in the digital economy, because they stress the importance of forced relationships (lock-ins) in order to build economies of scope, without considering the importance of active and socially rich participation, in order to leverage cooperation economies. Also, Information rules don't focus the attention on variables, which we believe is critical in a network economy: social exchanges, with their costs and their benefits. We call for an integration of the study of the content-side of the network economy with the study of its relationship-side, in the complexity of a all-connectable (not necessarily all-connected) world. The study of the role of brands in the digital economy can help highlight some of the important characteristics of this relationship economy. Brands in traditional marketing is the managerial tool for building differentiation in the relationships with the customers, in order to justify price premiums and build attitudinal and behavioral loyalty (Busacca and Castaldo, 1996; Rust et al., 2000; Busacca, 2000; Chaudhuri and Holbrook, 2001; Costabile, 2001), in exchange for their role as cognitive selectors (shortcuts) and uncertainty reducers (trust). This "management of complexity" role of brands is built around their ability to offer efficient relevant information during the customer search activity, and constant value (functional and affective) in the relationship experience. The result is a superior economic return for the firm. Brand trust and brand affect jointly determine purchase loyalty and attitudinal loyalty. Purchase loyalty leads to greater market share, and attitudinal loyalty leads to price premium for the brand. (Chaudhuri and Holbrook, 2001). On the Internet this value-appropriation role of brands is built one-to-one, in terms of micro-segmentation, versioning and dynamic pricing based on the individual value equations of the customers. But value-appropriation cannot forget the value-creation side of relationships. Price discrimination based on the one-to-one perceived value of the same product by different consumers tries to exploit the dynamic adjustment power of the economic web, but it falls short of the most important asset: legitimacy. Value is not an absolute matter. It is dynamic and relational (it is adaptive). And when we speak about trust and brands in digital economy we don't refer only to the idea that trust and brands can build long-lasting loyal relationships (Reicheld and Schefter, 2000; Urban, Sultan and Qualls, 2001; Shankar, Smith and Rangaswamy, 2002). We are speaking about the different nature of delegation and selection of variation that works online, compared to the traditional one, and we speak about the legitimacy of this selection following the neo-institutionalist approach (DiMaggio and Powell, 1983). We can consider the so-called "case of dynamic pricing" at Amazon.com. This case is widely used in public relations studies, because it is a good example of how companies on the Internet can easily fall in viral communication crises. We are, instead, here more interested in the reason why this crisis exploded. Amazon was found to be selling the same DVD movies for different prices to different customers. It was a test of the dynamic pricing philosophy (which states that customers should be charged according to their perceived value of the products and their means), built on the information about the buying habits of 23 million consumers. But customers evaluate and talk. One of them realized that if he excluded the cookie software on his computer, which identified him as a regular Amazon customer, the price of the DVD of Julie Taymor's "Titus" fell from $24.49 to $22.74. Chatting on

16

the web site DVDTalk.com, he diffused the news. The reaction of other Amazon customers, also in other newsgroups, was powerful. They were particularly distressed by the idea that Amazon charged higher prices to loyal customers (The Washington Post, September, 27, 2000). It is out of doubt that Amazon has strong brand power (power symmetry not just information symmetry) in the relationship with its customers, but this was not enough for letting them exploit the economic leverage of dynamic price discrimination. Customers, who accepted to pay a higher price when they decided to delegate variation reduction to the brand company in exchange for better service and future reassurance, refused to pay a higher price when they perceived that this price discrimination was not legitimated. Research indicates that capabilities and resources create competitive advantage when they are valuable, rare, and imperfectly imitable (Barney, 1986). This is the case of brands also in digital markets, but in these more complex and connected environments this competitive leverage must be nurtured with more intelligence, collaboration and transparency. Brands must be more intelligent (because through the learning network with business partners and consumers they can enrich their cognitive control of the market), and collaborative (because the values associated to the brand must be socially negotiated and mediated by the emergent and self-organized meaning that the periphery assigns to them). Collaborative marketing (Mandelli, 1998) doesn't mean that brands are not hierarchies anymore. It means that brand hierarchies are different: more legitimated and at the same time more able to cope with complexity. But brands and trust are not cost-free. If we analyse this in the framework of the economics of mediation, we understand that brands still are valuable intangible resources for firms that they can invest in cognitive economic exchanges. Brands still play the role of signaling trustability, driving customer selection and customer loyalty, which activate the economies of scope at the node level (one-to-one), and therefore generating value for the brand companies. But for their formation they require investments of tangible and intangible capital. Brands are built investing in product quality, quality of communication and quality of customer experience. They are sunk costs for firms. Also for consumers, brands drive both benefits and costs, both value capture and value invested. For consumers they work as trust-based shortcuts (benefits connected to the reduction of complexity and transaction costs for search and evaluation of different options), value associations (benefits connected to the symbolic area of consumption), but also information and power hierarchy (reduction and sacrifice of diversity). So there still are brand trade-offs, both for firms and for customers. But these trade-offs are evolutionary and negotiated at a more complex level than before. They are a matter of policy decisions, and policy decisions as we know (Lowi, 1964) are complex outcomes of planned and everyday negotiations in local, culturally and socially embedded policy arenas. Internet economy cannot be frictionless, because it' s a complex economy and a complex economy lives of delegation (even though not always vertical delegation), which is a form of hierarchy. But hierarchies are not all based on domination and coercion. Selection in a simple and authoritarian environment may be a matter of low transparency or trapping strategies; selection in a complex and connected environment is a matter of delegation and cooperation, and this is true also for brand hierarchies (figure 3).

17

LEGITIMACY

EF

FIC

IEN

CY

Low High

Low

High

Traditional

branding

Free

navigation

Walled-garden

portals

Collaborative

and intelligent

branding

Professional

media/

shopping bots

Figure 3 Efficiency and legitimacy in Internet infomediation: the role of collaborative branding Source: elaboration from Mandelli, 2001 So the attention moves to the sources, dynamics and results of social delegation and cooperation.

Trust, Delegation and bounded sociability Also independently from the new economic governance debate, academics have called for more systematic research into the role of trust in business relations, observing that: "It is clear that research on trust needs to advance beyond a catch-all residual in the unexplained random error" (Koza & Lewin, 1998,85). But this is not an easy task, since there is not clarity around the concept of trust itself. Regarding this gap, Mutti (1987: 224, cited in Castaldo, 2002, 2) writes that "the number of meanings attributed to the idea of trust in social analysis is disconcerting. Certainly this deplorable state of things is the product of a general theoretical negligence. It is almost as if, due to some strange self-reflecting mechanism, social science has ended up losing its own trust in the possibility of considering trust in a significant way". The notion of trust is widely used in different social science disciplines (sociology, economics, strategic management, organization, marketing, psychology) but often with different meanings. Castaldo (2002) has recently meta-researched the trust literature, and concluded that there is a lack of a clear and shared definition of the trust concept, even within the business research community. He did a meta-analysis of the different (70) definitions of trust, statistically clustering them, and proposing a multilevel construct-frame. He considered the construct profile (belief, attitude, willingness), the subjects involved in the relation (person, firms, institution), their profile (honest, competent, benevolent, committed), the role of risk, opportunism and vulnerability, and the trusting behaviors. Even though not all the studies hypothesized a direct causal relationship among these different variables, many placed them in a logical sequence: "This sequence often regards trust as the expectation, belief (and so on) that a subject with specific characteristics (honesty, benevolence, competencies, and so on) will perform actions designed to produce positive results in the future for the trustor, in situations of consistent perceived risk." (Castaldo, 2002,8) So trust is mostly conceptualized as the heuristics (beliefs that drives action) that help rationally bounded agents take risky decisions. This heuristics in the definitions examined is more or less based on self-interest (contrasted to altruistic motivations) and based either on the evaluation of the personality characteristics of the trustee or on their rational motivation to act positively for the trustor. But

18

basically almost all the authors consider trust as a cognitive tool or state, which we use to guide action in "the shadow of the future" (Axelrod, 1984).vii Castaldo (2002)'s content analysis found out that the words most used in the different definitions were: "action, will, expectation, belief". Very interestingly, cooperation was one of the least used terms. These definitions have in our research framework important limitations:

• They do not analyse the difference between bonding and bridging trust (trust in friends and trust in strangers);

• They define trust as a state, a static phenomenon;

• They don't consider the economics of trust, (there is no account for the costs of the invested resources in the process);

• They are only focused on the rational-choice dimension of trust and don' t consider the unthinking, emergent evolutionary component of trust dynamics.

This is why Castelfranchi and Falcone' s (1998 and 1999) model of trust dynamics is helpful. We are particularly interested in

• Their idea of trust as a dynamic process (trust builds trust),

• Their conceptualization of trust as cooperation (trust requires the investment of social resources),

• Their idea of trust as the antecedent of dynamic delegation (dynamic reduction of autonomy)

• Their conceptualizations of trust as complex mediation (external trust builds internal trust). "Delegation necessarily is an action, a result of a decision, and it too creates and is a (social) relation among x, y, and z. There may be trust without delegation: - either the level of trust is not sufficient to delegate, or - the level of trust would be sufficient but there are other reasons preventing delegation (for example prohibitions). So, trust is normally necessary for delegation, but is not sufficient: delegation requires a richer decision. There may be delegation without trust: these are exceptional cases in which either the delegating agent is not free (coercive delegation) or he has no information and no alternative to delegating, so that he must just make a trial (blind delegation)." (Castelfranchi and Falcone, 1998, 3) So trust drives cooperation but this doesn't necessarily mean that trust in relationships lowers hierarchies. Castelfranchi identifies two fundamental problems (Castelfranchi, 1990), studying social interaction in multi-agent systems: • The Sociality Problem: “why should autonomous agents enter into social interactions?” (Castelfranchi, 1990: page 49) • The Adoption Problem: “how can an agent get his problem to become social, i.e., get it adopted by other agents?” (Castelfranchi, 1990: page 49). Castelfranchi (1990) suggests that "dependence" is the informal answer to the sociality problem and power is the answer to the adoption problem. A ‘lack of power’ concerning their own goals (their inability to achieve them by themselves alone, which make other agents have "power over" them) make agents dependent on other agents; these agents' ‘power to influence’ someone else leads to goal adoption. According to this conceptualization, trust is not the opposite of hierarchy because trust is a form of hierarchy (cognitive selection). All cognitive hierarchies are at the same time selections (delegation, reduction of variation) and increase in diversity and freedom (symbolic value added by cognitive mediations). Mediation and delegation are not the same concepts, even though they are connected. Mediation, in our way of using this concept, focuses on the constructivist value added by symbolic interaction in cognitive and social encounters (cognitive and social associations). Delegation focuses on selection and complexity reduction.

19

Hierarchies are not all equal, since they are based on different forms of legitimacy of the mediation structures. (Weber, 1919) The concept of social delegation to media and legitimated gatekeepers in mass communication research can fruitfully be associated to the concept of external trust in environments or third parties, who mediate the dynamics of delegation in Castelfranchi and Falcone, 1999 (figure 4).

Internal core trust

Evaluation of y

before relying on it.

Beliefs about y’s competence,

self-confidence, motives for

cooperating.

willingness of

cooperating, and persistence.

RelianceThe decision of

relying on y

Delegation

Mental states Action

External core trust

trust in the environment

Core trust

Figure 4 Internal and external sources of trust Source: elaboration from Castelfranchi and Falcone, 1999

Trust dynamics Castelfranchi and Falcone (1999) propose a model of social engagement and cooperation, which include different views of goals and values driving collaboration. They may be instrumental and not instrumental. This model describes a circular link between trust (the beliefs - the "state of mind"), cooperative actions (engagement) and social effects (consequences). Trust builds trust and "... has a history". Also, trust is not only based on our beliefs about people and their willingness/abilities to cooperate in the present and the future (internal trust), but also is based on beliefs about the trustworthiness of the environment and third parties (external trust). Relational quality and trust formation are processes, guided by cooperation experience and available knowledge. "The interpretation of these experiences is a complex, multi-dimensional problem that is a function of the number, frequency, and gravity of their interactions; the difference between actual and expected outcomes; the nature of any transgressions; the intentions or motivations attributed to a partner's behavior; and any advance warning and/or post facto explanation of its actions by the partner. Furthermore, they may affect the partners' willingness to rely on each other in terms of any one of the three elements that influence performance-- organizational capacity, technical prowess, or integrity." (Arino et al., 2001). Trust comes out from relationships and it is built dynamically in the process. "Trust builds trust", as Castelfranchi puts it. Trust drives delegation but this is a dynamic delegation. If we focus only on trust as the belief about future actions of the trustee, we tend to study the characteristics of the trustee (trustability and reputation); we don't focus on what is relevant at the trustor level. And it is not enough to analyse the characteristics of the trustor's personality (the psycological and cultural variables which influence the tendence to trust somebody). We also need to focus on the process that builds this resource.

20

In an early study on cooperation in distant-education settings (Mandelli, 1995) we found that individual cooperation on the net, when not supported by previous knowledge and personal trust, tends to be fragile. The same result was found in a study by Jarvenpaa and Leidner (1998) on global virtual teams whose members were separated by location and culture. They concluded that "... global virtual teams may experience a form of ‘swift’ trust but such trust appears to be very fragile and temporal." (p. 1) Also in the organization literature social capital has been found as a pre-condition for the development of new alliances and greater trust. Networks are seen as repositories "... of information on availability, competencies and reliability of prospective partners. ... The more the emerging networks internalize information about potential partners, the more organizations resort to that network for cues on their future alliance decisions, which are thus more likely to be embedded in the emerging network. These new alliances, in turn, further increase the informational value of the network, enhancing its effect on subsequent alliance formation" (Gulati and Gargiulo, 1999, 1440-1441). Trust is not a one-shot state of the relationship. It is a dynamical and iterative process: "... nothing is set in stone. All collaborations start with a set of givens between the partners such as who they are, what has been said about them, and what their prior experiences have been with each other. While initial conditions are inherited, it would be wrong for management to assume that perceptions based on these givens are immutable. From the moment negotiations commence through the start-up and into the operation of the alliance, the relationship is a living entity subject to considerable growth and evolution, one that will be shaped by the partners' behavior." (Arino et al., 2001)

Bounded sociability and Internet social capital In order to test the idea that trust is not a costless resource, available in a frictionless social environment, we have included Castelfranchi' s concept of trust in the model we used to study the impact of the Internet on sociability (Mandelli, 2002). We report the most important findings from our study and elaborate on it, because they are relevant in order to help answer our research question about the role of trust in building social hierarchies. We tested the idea that "trust builds trust", and were also interested in the role of cognitive resources (cognitive energy and time) in this dynamics. Our model rests on the awareness that cognitive and social resources are finite and their economies influence social investments and cooperation. Norris (2000b) suggests that social cooperation is influenced by the availability of cognitive resources (cognitive abilities and time) and by the perception of self-efficacy in social engagement. In organizational settings Adler and Kwon (2002) stated that social capital is influenced by opportunity, motivation and ability, and that structural connections (access) might be not enough for building social ties; they also require the availability of the relationship and the cognitive dimensions of social capital. This framework, applied to individual level phenomena, suggests considering the role of cultural and cognitive resources in the process. Motivation, social capital and cognitive resources have also proved important predictors of cooperation in virtual communities of individuals (Kollock and Smith, 1998). This issue has long been studied by researchers interested in the effects of these new social aggregations on social engagement (Putnam, 2000; Norris, 2002). As research results (Norris, 2000) point out, there is a reinforcement effect in Internet sociability; usually actors who become more active on the web are the most active even offline. The others may be left out of the process. The reasons for this discouraging effect may be found (Norris, 2000) in:

• Lack of commitment by the individuals;

• Lack of individual cognitive resources (cognitive sophistication);

• Lack of individual social resources (social capital).

21

The economics of cognitive mediation suggest to pay attention not only to the net balance of the perceived benefits and costs in the cognitive exchanges (Simon, 1972; Neumann, 1991), but also to the stock of available cognitive and social resources. If they are not available, the individual actors or the policy-makers of the networks (the managers if we are in a business setting) must invest in building them. Applying this framework to individual relationships on the Internet (see figure 5), we hypothesized that in the digitally all-connected world, access to interactive communication and virtual community environments can foster the creation of social capital or destroy it, depending on the original set of cognitive, social and cultural resources available (for the operationalization of all the variables see Mandelli, 2002). Sociologists interested in Internet socialization processes helped highlight another important aspect of virtual social networking: the difference between bridging and bonding social ties. “Bridging social capital refers to social networks that bring together people of different sorts, and bonding social capital brings together people of a similar sort. This is an important distinction because the externalities of groups that are bridging are likely to be positive, while networks that are bonding (limited within particular social niches) are at greater risk of producing externalities that are negative.” (Putnam, 2000) Also Fukuyama (1995), applying the same concept to organizational coordination, claims that only trust toward the world outside the family fosters innovation and development, while the familistic culture hinders the ability to extend the richness and diversity of one' s social networks. In a world where innovation and learning make the competitive difference (Vicari, 1991; Nonaka and Takeuchi, 1995; Rullani and Vicari, 1999), social networks of independent firms are seen as the fittest coordination model (McEvily and Zaheer, 1999). An interesting research question regards the impact of the diffusion of network-based technologies on these trends. At the individual level, there is the risk that virtual communities lead more toward bonding sociability, and impede bridging possibilities, because they connect people with the same interests and lifestyles (Stolle, 1998; Preece, 1999). The Net may consume trust, rather than produce it, according to Uslaner (2000). In fact the Internet make people connect more with family members, friends and people with the same interests, than strangers (Cole, 2001). This is consistent with the so-called balkanization hypothesis, developed by Van Alstyne and Brynjolfsson (1997), who suggested to " ... examine critically the claim that a global village is the inexorable result of increased connectivity." Their conclusion comes from the analysis of the constraints posed by limits of what is known as "bounded rationality" (Simon 1959). "... even in a lifetime, few people have significant relationships with more than a few thousand others. As long as human information processing capabilities are bounded, electronic media are unlikely to dramatically change this total.(Van Alstyne and Brynjolfsson 1997, 3-4). Contrary to the simple equation between trust and networks, the balkanization hypothesis envisions a networked world where bonding ties (ties with similar people) will hamper cooperation and in which variety and innovation at the system level will be lost. We also included this hypotesized link in our model (figure 5). In short we tested whether values, individual happiness, cognitive resources, time, trust in people online, trust in Internet communication environments, and access to people's social network through the Internet, influence people' s use of the communication cooperative applications on the Internet (email, chats and virtual communities). Then we tested if all these variables, and bonding offline social capital (relationships with family and friends) influenced changes in the number of regular relationships on the Internet.

22

Internal trust,

External trust

Self-confidence

Use of

interpersonaland

collaborative

environments

on the Internet

Values

&

culture

Education, technology

literacy and time

Offline bonding

social capital

Positive

and

negative

changes

in

offline and

online

social

capital

Diffusion of

Internet access

in people’s

social network

Individual

wellness

Figure 5 A model of trust and social capital dynamics on the Internet Source: Mandelli, 2002 The data were elaborated using multivariate regression statistical analysis, organized in a path-analysis sequence. The results confirmed the model hypothesized, but for the direct influence of time constraint on sociability behaviorviii. The following figure (figure 6) represents the synthesis of the regression paths, which describe the most relevant regression relationships found (see the methodological appendix in Mandelli, 2002 for the statistical coefficients and levels of significance).

Using the

Internet

increased

regular social

contacts

Made

new

friends

online

Using the

Internet decreased

contacts

with family

& friends

Using the

Internet

increased

contacts with

family & friends

Time used

to chat

Time used

to email

External

trustInternal

trustLack of

Internet

access of

family & friends

Number of

friends

Younger

age

Education Southern

local

culture

Internet

self-confidence

-

-

Alienation

-

Family

bonding

ties

Technological

literacy

-

-

-

-

Values

= low significance

23

Figure 6 Empirical results on trust and social capital dynamics on the Internet Source: Mandelli, 2002 The use of the interpersonal communication environments of the Internet (virtual communities and chats) can drive the creation of both bonding (within the community) and bridging (out-of-the community) social capital. Using email and group communication people can foster relationships with family and friends -- but also with people they have never met before (new friends online). Also the path-dependent nature of the social capital building process is confirmed. There is a reinforcing link between offline and online social capital. People who have stronger ties with family members and friends are more likely to increase their regular contacts with them after they start using the Internet. But they do it, of course, if they can access them through email and other interpersonal communication tools of the web. The digital access divide may drive a social divide. Using chatrooms and virtual communities, people can make new friends. But not everybody uses these collaborative applications. The use of these communication formats (and the consequent effect on regular relationships) is mediated by age and internal trust (trust in the people they are going to interact with), that is people who think that is easier to meet other people online than in face-to-face are more likely to use the synchronous communication environments of the Internet (chat) and make friends online. Results also confirmed the link between internal and external trust. External trust (here operationalized as trust in the Internet community environments) helps create trust in online people. Even though time stress showed no relationship with sociability outcomes, the data supported the hypothesis that the availability of cognitive and intangible resources influences cooperation behavior and sociability phenomena. There was a significant relation between the increase in the number of regular contacts with people with the same hobbies, the same religious interests and the same political interests, and the decrease in the number of regular contacts with other social groups. This, which we call a "switching bonding ties" effect, seems to capture the adaptation to social changes predicted by the balkanization hypothesis reviewed above, which predicts that the scarcity of intangible resources and the increased access to people with similar interests drive the reduction of ties with other social groups. In short, our study found that the Internet can foster or harm certain categories of social relationships, and therefore can have both positive and negative effects on the construction of social capital, depending on specific personal and social pre-conditions Our finding links the risk of increased society fragmentation not to alienation effects of the Internet, but instead to those adaptive and evolutionary selection effects necessary for managing the economics of cognitive and time-based costs of relationships in complex interconnected social networks. Also culture matters. In our study Italian southern local culture explained different important results concerned with Internet sociability. Time dedicated to chatting was predicted by southern residence (also by younger age, lower education, lack of family bonding ties, Internet civic self-confidence and internal trust). Also the decrease in the number of regular contacts with family and friends was linked to local residence. This negative sociability result was influenced by lack of Internet connections of people's family and friends. This is a confirmation of the idea that the first dimension of digital divide (the differential Internet connectedness of people) has consequences on the other dimensions of network connection. In short we found evidence for the idea that:

• Trust is a dynamic process (trust builds trust);

• The formation of trust is constrained by the stock of available cognitive and social resources;

• The formation of trust is embedded in local culture. Thus, there seem to be a virtuous circle driving cooperation and the creation of new social capital in complex social networks -- which describes the adaptive interplay among the stock of social, technological and cognitive resources with civic engagement, and which may also explain

24

culturally-influenced Internet social effects. But this virtuous circle can become vicious, when there is a gap or an instrumental/economic imbalance of social, technological, and cognitive resources at the individual relationship level. Our conclusion from these results is that Internet users, as all citizens, have access to a new environment for socializing and cooperation. Confirming its mass media social function (Morris and Ogan, 1995), the Internet is not neutral: it opens new, plural, parallel and also conflictual social possible designs of our individual and system-level life, because it changes the potential structures of interpretations of the world and cooperative activities. It changes the transaction costs of relationships (the instrumental and not instrumental costs for social encounters on the complex interconnected network) in a comples, not linear way, and it influences the stock of our social and cognitive resources. The outcome is neither simple nor unidirectional, contrary to what promised by the information symmetry hypothesis on Internet diffusion.

Conclusions

The frictionless paradigm in the Internet research literature predicts the elimination of hierarchies and the spread of new network-based forms of governance, based on the assumption that the Internet will diffuse access to information and relationships and the new transaction-cost-free networks will foster both dynamic exchanges and cooperation. We have challenged this view providing secondary and primary empirical evidence for new hierarchies created in networked social systems, and giving theoretical justifications for these empirical findings. New hierarchies in network society are created out of the cognitive complexity of the systems, coupled with human bounded rationality and bounded sociability. Another complex effect comes from the contemporary impact of the network technologies on the economies of the infomediary-content infrastructures and the economies of relationships (economies of scope and networks externalities). But the resulted new social organizations are not simply more hierarchical, because the increased interconnection (and the dynamics of social capital) also decreases cognitive hierarchies. Networks are not simply a more democratic and socially rich alternatives to hierarchies, coordinated through trust instead of price or authority. They are complex systems in which different coordination mechanisms and different types of hierarchies are present. Hierarchies are not eliminated because transaction costs are not eliminated. Also in network economy we are rationally bounded, and we can also found the same scarcity effect in sociability processes. Transaction costs, and the need for cognitive and social hierarchies, might be reinforced by the uncertainty and the complexity of the new social systems. The real novelty of the new social and organizational networks doesn't seem to be the different degree of hierarchy, but the different degree of interconnection (complexity) and flexibility (dynamism of connections) of the systems. The social side of these transformations is not captured by the approaches to network society that empathize deterministic and radically liberist views of the relationship between technology and social change. On the social side of these transformations Powell (2001) sees a polarization of society groups and emerging a "winner take all" ethics, " in which success creates increasing returns; that is, the capabilities, skills, and experiences of those who have prospered rebound such that they are vastly better positioned and qualified than those left behind. This reinforcing cycle is virtuous for the winners, vicious for the losers". Analyzing the negative social effects of the flexibility of networked organizations, at the expense of a downsized workforce, Harrison (1994) sees a "leaner but also meaner" social organization emerge from these changes. Calling this phenomenon “concentration without centralization,” Harrison argues that firms that have mastered global network production couple a core-ring structure (characterized by a privileged solid center connected to a disadvantaged, and overexploited networked periphery) with the use of computerized technology for coordinating flexible intra-firm and inter-firm networks. In his view

25

the governance mix comprises both cooperation (with the strategic core of employees and partners) and domination (of the powerless periphery of the network). But Powell (2001) doesn't think that this unequal and hierarchic outcome of the network revolution is intrinsic to the network society. It is an option, which is important to be aware of, but not automatically emerging from the distributed capitalism. He writes: "... it is wrong, I believe, to argue that the new system is just a kind of decentralized Fordism or a wolf in sheep’s clothing. We are undergoing a period of 'creative destruction', in which the established practices of one regime are being replaced by new ones. ... but it is not at all clear that these inequalities are a necessary component of the new form." (Powell, 2001, 29) Social order and social organization are political outcomes, not technological recipes. Technology can foster flexibility but also coordination. It can help periphery to be connected with other peripheries and with the center, without loosing flexibility. It's a matter of design of the network; it's a matter of negotiated structures of the networks. The network society can be a more hierarchical society or a more democratic one, depending on the social and policy decisions of individuals and groups, since also in the digital world there are trade-offs and alternatives, shaped by economic and social constraints and opportunities, and therefore also in the digital society freedom and quality of life are built out of ethical and policy agendas and arenas. We accept the call of Rullani (1998) to challenge the fundamentalist idea that technology liberates the invisible hand of markets in societies, beyond the need for collective choice and action, and Rullani and Vicari' s (1999) call for a more complex understanding of the complex issues posed by the exploding connectivity in societies. But, with them, we don't propose a conservative view of the impact of new communication technologies on society and economies. We also believe that network technologies can open very powerful opportunities for change and improvement of the quality of individual life and societies.

References Adler P. S., & Kwon, S. W. (2002). Social Capital: Prospects for a New Concept. Academy of

Management review. Vol. 27, N. 1. 17-40. Adler, P. (2001). Market, hierarchy and trust: The knowledge economy and the future of capitalism Organization Science. Mar/Apr 2001Linthicum. Agre, P. E. (2001). Hierarchy and History in Simon's "Architecture of Complexity". Working Paper. Ancarani, F.; & Shankar, V. (2002) Price Levels and Price Dispersion on the Internet: A Comparison of Pure Play Internet, Bricks -and-Mortar, and Bricks-and-Clicks Retailers. Working paper. Arino, A.; De La Torre, J.; Smith Ring, P. (2001) Relational quality: Managing Trust in Corporate Alliances. California Management Review. Fall 2001. Axelrod, R. (1984). The Evolution of Cooperation. New York: Basic Books. Axelrod, R.; & Cohen, M.D. (1999). Harnessing Complexity: Organizational Implications of a

Scientific Frontier. New York: Free Press.

26

Bakos, Y. (1997). Reducing Buyer Search Costs: Implications for Electronic Marketplaces. Management Schience Vol. 43. [Available at http://www.stern.nyu.edu/~bakos] (last accessed 8 Juni 2001). Bakos, Y. (1998). "The Emerging Role of Electronic Marketplaces on the Internet," Communications of the ACM, Vol. 41, No. 8, pp. 35-42. Bakos, Y. (2001). The Emerging Landscape for Retail E-commerce. Journal of Economic

perspectives. 15. 69-80. Barney J.B., & Hansen M. H. (1994) Trustworthiness as a source of competitive advantage. Strategic Management Journal, Winter Special Issue, 15, pp. 175–190. Barney, J. B. (1986) Strategic factor markets: Expectations, luck, and business strategy. Management Science. 32: 1231-1242. Bergman, M. K. (2001). The Deep Web: Surfacing Hidden Value. White Paper, Brightplanet. Bressler, S.; & Grantham, C. (2000). Communities of Commerce. McGraw Hill. Brown, J. S.; Durchslag, S.; Hagel III J. (2002). Loosening up: How process networks unlock the power of specialization. McKinsey Quarterly.

Browne,C. (1998). Linux and decentralized development, First Monday, vol. 3. Brynjolfsson, E., & Smith, M. D. (2000). Frictionless Commerce: a Comparison of Internet and Conventional Retailers. Management Science. April 200. 46 (4): 563-585. Busacca, B.( 2000). Il valore della marca tra postfordismo ed economia digitale. Accumulazione,

Ampliamento, Attivazione. Egea, Milano. Busacca B., & Castaldo S. (1996). Il potenziale competitivo della fedeltà alla marca e all'insegna.

Una metodologia di misurazione congiunta. Egea, Milano. Carey, J. (1989). Communication as Culture. Essays on Media and Society. Unwin Hyman. Carr, N.G. (2000). Hypermediation: Commerce as Clickstream. Harvard Business Review. Boston: Harvard Business School Press. Vol.78, No.1 (January-February). Castaldo, S. (2002). Meanings of Trust: A Meta-Analysis of Trust Definitions. Euram Annual Conference Paper. Castelfranchi, C.( 1990). Social Power: A Point Missed in Multi-Agent DAI and HC. Castelfranchi, C. (1998). Through the Minds of the Agents. Journal of Artificial Societies and

Social Simulation vol. 1, no. 1, [Available at http://www.soc.surrey.ac.uk/JASSS/1/1/5.html]. Castelfranchi, C. (2000). Engineering Social Order. ESAW 2000: 1-18. Castelfranchi, C.; & Falcone, R. (1998). Towards a Theory of Delegation for Agent-based Systems. Robotics and Autonomous Systems. 24: 141-157.

27

Castelfranchi, C.; & Falcone, R. (1999). The socio-cognitive dynamics of trust: Does trust create

trust?. Working paper. Cawkell, T. (2001). Sociotechnology: the Digital Divide. Journal of Information Science, Vol. 27. Chaudhuri A.; & Holbrook M. B. (2001). The chain of effects from brand trust and brand affect to brand performance: The role of brand loyalty Journal of Marketing. 65 (2) 81-93. Chen, P. Y., & Hitt, L. M. (2001). Measuring the Determinants of Switching Costs: A Study of the On-Line Brokerage Industry. Proceedings of the International Conference on Information Systems.

Cole, J. (2001). Surveying the Digital Future. Center for Communication Policy, Ucla. Research report. Compaine, M. (2001). The Digital Divide: Facing a Crisis or Creating a Myth?. Boston: MIT Press. Costabile, M. (2001). Il Capitale Relazionale, McGraw-Hill, Milano.

Dagnino, G. B., & Padula, G. (2002). Coopetition Strategy. A New Kind of Interfirm Dynamics for

Value Creation. Paper presented at Euram 2002. Devine D. A.;Dugan C. B.; Semaka N. B.; Speiker J. D. (2001). Building Enduring Consortia.

McKinsey Quarterly. N. 2.

DiMaggio P.; & Powell W. (1983). The iron Cage Revisited. Institutional Isomorphism and Collective Rationality in Organizational Fields. American Sociological Review. 48(2): 147-160. DiMaggio P.; & Hargittai E. (2001). From the ‘Digital Divide’ to `Digital Inequality’: Studying

Internet Use As Penetration Increase. Working Paper. Sociology Department, Princeton University. DiMaggio P.; & Powell W. (1991). The New Institutionalism in Organizational Analysis Chicago: University of Chicago Press. Evans, P.; & Wurster, T. (2000). Blown to Bits: How the New Economics of Information

Transforms Strategy. Boston: Harvard Business School Press. French, J.; & Raven, B. (1959). The Bases of Social Power. In Studies in Social Power, D. Cartwright, (Ed.): 150-167. Ann Arbor, MI: Institute for Social Research. Fukuyama, F. (1995). Trust: the social virtues and the creation of prosperity. London: Hamish Hamilton. Fukuyama, F. (1999). Death of the hierarchy. Financial Times, 12 June, I. Gans H., (1979). Deciding What’s News. Pantheon Books, New York.

Gottardi, G. (1998). Reti Industriali e Nuove Forme di Organizzazione Industriale: alle origini della Nuova Domanda Politica. In Rullani, E. and Romano, L. (eds.) Il Postfordismo. Idee per il

Capitalismo Prossimo Venturo. Milan. Etas.

28

Grandori, A. & Neri, M. (1999). The fairness properties of interfirm networks. In A. Grandori (ed.), Inter-firm networks. London, Routledge. Grandori, A., & Soda (1995). G. Inter-firm networks: Antecedents, mechanisms and forms. Organization Studies. 16(2):183—214. Grewal R.; Comer J. M.; Mehta R. (2001). An investigation into the antecedents of organizational participation in business-to-business electronic markets. Journal of Marketing. 65: 17-33. Gulati, R.; & Singh, H. (1998). The Architecture of Cooperation. Managing Coordination Costs and Appropriation Concerns in Strategic Alliances. Administrative Science Quarterly. 43: 781-414. Gulati, R.; & Gargiulo, M. (1999) Where do Organizational Networks Come from? American

Journal of Sociology. 194 (5): 1439-1493. Hagel, J. (1999). Net Gain: Expanding Markets through Virtual Communities. Journal of

Interactive Marketing. Vol. 13 (1). Hagel, J.; & Singer, M. (1999). Net Worth Shaping Markets when Customers make the Rules. Boston: Harvard Business School Press. Harrison, B. (1994). Lean and Mean: The Changing Landscape of Corporate Power in an Age of

Flexibility. New York: Basic Books.

Hoffman, B.; Keedy, J.; Roberts, K. (2002). The Unexpected Return of BtoB. McKinsey Quarterly

Online.[Avalailable at www.mckinseyquarterly.com]. Jarvenpaa, S. L.; & Leidner, D. (1998). Communication and Trust in Global Virtual Teams. Organization Science and Journal of Computer Mediated Communication. June 1998. Johnson, E. J.; Moe, W.; Fader, P.; Bellman, S., and Lohse, J. (2000). On the

Depth and Dynamics of World Wide Web Shopping Behavior. Working Paper, Department of Marketing, Columbia Business School, New York.

Kaplan & Sawhney (2000). 'E-Hubs: The New B2B Marketplaces', HBR, May-June 2000

Kelly, K. (1997). New Rules for New Economy. Wired. http://www.wired.com Kogut, B. & Zander, U. (1996). What firms do? Coordination, identity, and learning. Organization

Science 7: 502–518. Koka, B.R.; & Prescott, J.E. (2002). Networks in transition: How industry events (re)shape interfirm relationship. Strategic Management Journal. 19(5): 439–460. Kollock, P.; & Smith, M. (1998). Introduction. In Smith and Kollock (eds.) Communities in Cyberspace. London. Routledge. Koza, M.P.; & Lewin, J.A. (1998). Organization Science. 9(3) 255-264.

29

Latzer, M.; & Schmitz, S. W. (2001). B2C eCommerce: A Frictionless Market is Not in Sight –

Arguments and Policy Implications – Working Paper Research Unit for Institutional Change and European Integration – ICE. Austrian Academy of Sciences, Vienna. Levine, R. (1999). Cluetrain Manifesto: The End of Business as Usual. Cambridge: Perseus. [Available at:http://www.cluetrain.com/book.html]. Litan, R. E., & Rivlin, A. M. (2001). Projecting th Economic Impact of the Internet. The

American Economic Review Papers and Proceedings 91 (2):313-317.

Lorenzoni G.; & Lipparini A. (1999). The Leveraging of Inter-firm Relationships as a Distinctive Organizational Capability: An Organizational Study. Strategic Management Journal. 20: 317–338. Lowi, T. J. (1964). American Business, Public Policy, Case Studies, and Political Theory. World Politics. Volume XVI No. 4, pp. 677-715. Lynch, J.G.; & Ariely, D. (2000). Wine Online: Search Cost Affect Competition on Price, Quality

and Distribution Marketing Science. Winter. Macy, M. (1998). Social Order in Artificial Worlds. Journal of Artificial Societies and Social

Simulation. [Available at:http://www.soc.surrey.ac.uk/JASSS/1/1/4.html]. Mandelli, A. (1995). Collaborative Learning on the Internet. Paper presented at Hypermedia 95 conference. Indiana University. Bloomington,. IN Mandelli, A. (1997). Conoscenza e fiducia. Economia delle risorse intangibili nel cyberspazio. Economia & Management. Milan: Etas. Mandelli, A. (1997b). The Internet and the New Media: Mass Communication for Relationship

Marketing. Proceedings EMAC Annual Conference. Warwick. Mandelli, A. (1998). Internet marketing. Milan: McGraw Hill. Milan. Mandelli, A. (1999) E' il Momento dei Portali. Dureranno? Problemi dell' Informazione. n. 1. Mandelli, A. (2001). Marca collaborativa e intelligente: relazione e infomediazione in Rete. Mandelli, A. (2001b). New simmetries or new hierarchies in the networked public relationships?

Paper presented at Wapor Annual Conference. Rome. Mandelli, A. (2002). Bounded Sociability. Relationship Costs and Intangible Resources in Complex Digital Networks. IT & Society. 1(1). Mandelli, A. (2002b). The symmetry fallacy: economics of relationships and new hierarchies in the

Italian digital society. Paper presented at ICA 2002 annual conference. Seoul, Corea. Mandelli, A. (2003). Value, trust, delegation and community: the complex interplay of self-organization and new hierarchies in complex evolutionary value networks. In Trust in Knowledge

Management and Systems in Organizations. Maija-Leena Huotari and Dr. Mirja Iivonen (eds.) IPG.

30

McCombs, M.; Shaw, D. and Weaver, D. (1997). Communication and Democracy. Exploring the

Intellectual Frontiers in Agenda-Setting Theory. Mahwah : Erlbaum. McEvily B.; & Zaheer A. (1999). Bridging ties: A source of firm heterogeneity in competitive capabilities. Strategic Management Journal, 20: 1133-1156. Merton R. K. (1957). Social Theory and Social Structure. Glencoe, IL: The Free Press.

Moon Y.; Sproull L. (2000) Essence of Distributed Work: the Case of the Linux Kernel. First

Monday. 5(11) [Available at: http://firstmonday.org/issues/issue5_11/moon/index.html]. Morris, M.; & Ogan, C. (1995). Internet as Mass Medium. Journal of Computer Mediated

Communication. Morris, Z. (2001). Theories of Legitimacy. In Jost J. and Major B. (eds.) The Psychology of Legitimacy. Emerging Perspectives on Ideology, Justice, and Intergroup Relations. Cambridge:

Cambridge University Press.

Nahapiet J., & Goshal S.( 1998). Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23( 2): 242- 266. Nelson, R. R.; & Winter S. C. (1982). An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press. Neuman, W. R. (1991). The Future of Mass Audience. Cambridge: Cambridge University Press. Neuman, W. R.; Zimmer E.; Stromer-Galley J.; Hunter, C.; and Montero, E. (1999). Caught in the Web. White Paper. University of Pennsylvania. Annenberg Public Policy Center.

Nonaka, I.; & Takeuchi H. (1995). The KnowledgeCreating Company. New York: Oxford University Press.

Norris, P. (2000). Democratic Divide?. Paper presented at the American Political Science Association Annual Conference. Washington. Norris, P. (2000b). Preaching to the Converted? Pluralism, Participation, and Party Websites. Working paper. Boston: Shorenstein Center John F. Kennedy School of Government Harvard University. Norris, P. (2001). Digital Divide? Civic Engagement, Information Poverty and the Internet in

Norris, P. (2002). The Bridging and Bonding Role of Online Communities. Press-Politics. Editorial. Pan. X.,; Ratchford, B.T. and Shankar, V. (2001). Why Aren’t the Prices of the Same Item the Same at Me.Com and You.Com? Drivers Of Prices Dispersion Among E-Tailers. Working Paper.

University of Maryland.

Pine, J; Gilmore, B. and Pine II, B.J. (1999). The Experience Economy. Boston: Harvard Business School. Porter, M. (2001). Strategy and the Internet. Harvard Business Review. Boston.

31

Powell, W. W.; Koput, K.; Bowie J. I.; Smith-Doerr, L. (2002). The spatial clustering of science and capital: Accounting for biotech firm-venture capital relationships. Regional Studies. 36(3): 291-305. Powell, W.W. (2001). The Capitalist Firm in the 21st Century: Emerging Patterns. In Di Maggio (ed.) The Twenty-First Century Firm. Princeton University Press. Preece, J. (1999). Empathic communities: Balancing emotional and factual communication. Interacting with Computers, The Interdisciplinary Journal of Human-Computer Interaction. 12, 1, 63-77. Putnam, R. (2000). Bowling Alone: The Collapse and Revival of American Community. NY: Simon and Schuster. Putnam, R. (1993). Making Democracy Work: Civic Traditions in Modern Italy. Princeton: Princeton University Press. Rajgopal, S.; Venkatachalam, M. and Kotha, S. (2000). Does Quality of Online Customer

Experience Create a Sustainable Competitive Advantage for E-commerce Firms?. Working Paper. University of Washington. Reicheld, F.; & Schefter, P. (2000). The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value. Harvard Business Review. Boston: Harvard Business School. Rheingold, H. (1993). The Virtual Community: Homesteading on the Electronic frontier. Reading: Addison-Wesley. Rullani, E. (1998). Dal fordismo realizzato al postfordismo possibile. la difficile transizione. In Rullani E. and Romano L. (eds.) Il Postfordismo. Idee per il Capitalismo Prossimo Venturo. Milan. Etas. Rullani, E.; & Vicari, S. (1999) Sistemi ed Evoluzione nel Management. Milan. Etas. Rust R. T.; Zeitham V.l.; and Lemon K. N. (2000). Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy. New York: The Free Press. Salancik, J. (1995). WANTED: A good network theory of organization. Administrative Science

Quarterly, 40, 345-349.

Saxenian, A. (1994). Regional Advantage. Cambridge: Harvard University Press. Schudson, M. (1973). Discovering the News. New York: Basic Books, Inc. Publishers. Semetko, H.; & Mandelli, A. (1997). Setting the Agenda for Cross-National Research: Bringing Values Into the Concept. In McCombs et al. (eds.) Communication and Democracy. Exploring the

Intellectual Frontiers in Agenda-Setting Theory. Mahwah: Erlbaum. Shankar, V.; Rangaswamy, A. and Pusateri, M. (2001). The Online Medium and Customer Price

Sensitivity. Working Paper. University of Maryland.

32

Shankar, V.; Smith, A.K., and Rangaswamy, A. (2002). Customer Satisfaction and Loyalty in

Online and Offline Environments. Working Paper. University of Maryland. Shapiro, C.; & Varian, H.R. (1998). Information Rules. A Strategic Guide to the Network Economy.

Boston: Harvard Business School Press. Simon, H. (1959). Theories of Decision-Making in Economics and Behaioral Science. AER. Simon, H. (1972). Theories of Bounded Rationality. in Radner and Radner, editors, Decision and Organisation. Smith, M. D.; Bailey, J. and Brynjolfsson, E. (1999). Understanding Digital Markets: Review and

Assessment. [Online]. Boston. [Available at: http://ecommerce.mit.edu/papers/ude]. Stolle, D. (1998). Bowling Together, Bowling Alone: The Development of Generalized Trust in Voluntary Associations. Political Psychology. 19:497-526. Sullivan, D. 2001. Buying Your Way In To Search Engines. SearchEngineWatch.com, 2 May 2001. [Available at: http://www.searchenginewatch.com/webmasters/paid.html] (last accessed May 2001). Tapscot, D., Ticoll, D., and Lowy, A. (2000). Digital Capital: Harnessing the power of business

webs. Boston: Harvard Business School Press. Tapscott, Don. (1996). The Digital Economy: The promise and peril in the age of networked

intelligence. McGraw-Hill. Tsai, W. (2000). Social capital, strategic relatedness, and the formation of intra-organizational strategic linkages. Strategic Management Journal 21: 925-939.

Urban, G.L.; Sultan, F.; and Qualls, W.J. (2001). Response to Adler, "Market, hierarchy, and trust" Organization Science; Linthicum. Uslaner, E. (2000). Trust, Civic Engagement and the Internet. University of Maryland. Paper Prepared for the Joint Sessions of the European Consortium for Political Research, Workshop on Electronic Democracy: Mobilisation, Organisation, and Participation via New ICTs. University of Grenoble. Van Alstyne M.; & Brynjolfsson E. (1997) Electronic Communities: Global Village or Cyberbalkans? MIT Sloan School. March 1997.

Vicari S., (1995). Brand Equity. Il Potenziale Generativo della Fiducia. Milano, Egea.

Vicari, S. (2001). L' Economia della Virtualità. Milan: Egea. Vicari, S., (1991). L’ Impresa Vivente. Milano: Etas. Wathne K. H.; Biong H.; and Heide J.B. (2001). Choice of supplier in embedded markets: Relationship and marketing program effects. Journal of Marketing. 65(2): 54-66. Weber, M. (1919, ed. 1996). Lavoro intellettuale come professione. Einaudi, Torino.

33

Williamson, O. E. (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A Study in

the Economics of Internal Organization, Free Press, New York, NY. i Returning to the original meaning built in the early discussions on the web, and beyond the later and more restricted versions of the concept (Hagel and Singer, 1999), we define infomediaries (see Mandelli, 2001) as systems that make the interaction of cognitive sub-systems (individual and second-level) possible and more efficient. These systems provide symbolic mediation (association), beyond functional connectivity. They were the media in the mass communication era. They are the new infomediaries (portals, communities, content sites on the web) in the Internet era. ii We use this concept (Mandelli, 1997 and 1998) for describing the special logistics of information and relationships on the Internet, not constrained by geography anymore but constrained by complexity iii The production of several versions of the same product in order to apply differential prices iv A lock-in occurs when a consumer is faced by switching costs, costs he will incurr only if he decides to switch supplier and brand. Among the lock-in strategies: loyalty programs, penetration pricing (free initial versions of the product with expensive upgrades) v Though this trend would be contrasted by the advertising-based business models of the infomediaries (Mandelli, 1999) vi The World Internet Project is an international research project, promoted by 25 research institutions in the world, which studies the impact of the Internet on society. See www.worldinternetproject.net for details. The Italian section of the project is based at SDA Bocconi, the business school of Bocconi university in Milan, Italy vii Axelrod coined the phrase "shadow of the future" to describe the force that keeps a player cooperating, even when there is not immediate perceived utility coming out from this behavior, in light of future expected benefits viii We believe that the influence of time constraint might have not been captured by the operationalization of this concept in our model (answer to the question: "Do you feel busier than the average person?"). Further research on this issue is needed.