Lecture 2: Economic aspects of platforms

What drives the success of digital platform ecosystems?

• Network effects

• Clustering

• Disintermediation

• Multi-homing

• Netwirk Bridging

Why are the five basic network properties important a platform?

• they shape its scalability, profitability, and sustainability

What are direct and indirect network effects?

• direct = same-side:

  • occur when the value for a user increases directly because more users from the same user group join the platform

  • Facebook: The more friends in your network the more friends you can get through your firends connections

• indirect = cross-side:

  • occure when growth on one side of the platform increases the value for users in another side

  • two different groups of participants (e.g. users and app developers) attract each other

  • Example: More app developers create more apps, making the platform more attractive to users. More users then attract even more developers

How can the strength of network effects shape value creation and capture?

• strength of network effects refers to how much additional value is created as more users join the platform

strong network effects:

• value provided by a platform rise significantly with the number of participants

• Example: Facebook or WhatsApp: More users generate more interactions and content, making the platform increasingly valuable (loop)

weak network effects:

• value provided by a platform rise not that significantly with the number of participants

• Growth alone does not create a major competitive advantage, so platforms must rely more on product quality, innovation, pricing, or content.

• Example: Netflix (More subsribers do not directly increase the value for existing users, although they may indirectly enable investments in better content
  

The strength of network effects can change over time. Give an Example

Windows:
in the past: the value increased significant as the number of developers writting apps for it (strong network effects)

• reason: apps where client based (apps lived on the computer)

than: Android, Chrome, iOs operation systems gain strength on PC and Network → Windows networks effects took off

• reason: internet based apps worked across different operating systems

If a company´s network effects weaken so does its market position

What is the concept of Network Clustering?

• describes how a network is organized into local or global clusters

• The more a network is fragmented into local cluster and the more isolated those clusters are from one another the more challanges there are for a business to handle (weaker network effects, lower entry barries)

• globally connected clusters generate stronger network effects and make it more difficult for competitors to enter the market

- Uber: other ride-sharing services could enter the local network cluster with lower prices than Uber because riders and drivers only interact within the same city

- Airbnb: network is a large global cluster → challanger would have to enter the market on a global scale (expensive)

- possible to strengthen a network by building global cluster on top of local cluster

• Facebook: enhanced their original local network by getting global brands to create public accounts to attract global user

Why is disintermediation not good for transaction platforms?

Disintermediation = network members pass a hub and interact directly with each other

• If a user has found the right match, there’s little incentive to return to the platform and if offerer has enough clients he will not need the platform anymore
  

Which mechanismen could platforms use to deter disintermediation?

• creating terms of service (e.g. to prohibit users doing transactions outside the platform)

• blocking users from exchanging contact information (but risk that competitive with better user experience try to enter the market(

• enhancing the value of conducting business on them (e.g. facilitae transactions by providing communication tools)

• capture value before two sides even agree to work together (e.g. charges for lead generation)

• value through advertising revenue

• providing complementary services instead of charging transaction fees
  

What is multi-homing? Give examples.

= users or service providers (= network nodes) form ties with multiple platforms at the same time
- happens when cost adopting an additional platform is low

• Users use Uber and Bold to compare prices and wait time

• restaurants workes with multiple food-delivery platforms

• app developer deelops aps for iOS and Android

What is the problem of multi-homing and how can platform owner reduce it?

• Problem: difficult to generate profit from its core business (e.g. Uber and Bold compete for riders and drivers)

• Reducing multi-homing on one side of the market may increase multi-homing on the opposite side

• locking one or both sides of the market

  • e.g. Uber:

    • give users bonuses when they booked a specific number of rides without cancelling it

    • drivers get new requests for pickup new passengers very close to drop off location of current passenger to reduce waiting time

Explain the concept of network Bridging.

• growth strategie: to connect different networks to one another

• to diversify into different lines of business t improve the economics

• connecting with different networks (markets) can built synergies

• e.g. Amazon has moved from e-commerce to entertainment and consumer electronics

• e.g. Alibaba bridged its payment platform Alipay with its e-commerce platform Taobao and Tmall