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Network Effects, Software Provision, and Standardization
Abstract
In this paper, the authors examine the software provision decision of software firms. The provision decision by software firms determines the value and, hence, the market share of competing hardware technologies. The authors show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization, with only one hardware technology supplied with software in equilibrium. They show that when consumers place a high value on software variety there is a suboptimal amount of standardization by the market. Copyright 1992 by Blackwell Publishing Ltd.
... The literature on inter-platform competition (Armstrong & Wright, 2007;Church & Gandal, 1992, 1993 usually builds a four-sided game model that includes platforms A and B (representing two different technology standards), the complementary product providers, and the final consumers. These studies use the concept of the Nash equilibrium to predict the result of the game. ...
... The greater the k, the greater the degree of differentiation. Church and Gandal (1992) did not define the meaning of f and only supposed that f.k in order that U (x 1 , x 2 , Á Á Á x m ).0. 3 Further, Church and Gandal (1992) assume that the consumer's budget constraint is P i r i x i = y À p h , where y is the total budget for platform and suppliers, p h is the price of platform h (provided consumers only buy one unit of platform), and r i is the price of supplier i, and the consumer chooses the supplier combination x 1 , x 2 , :::, x m ð Þto maximize (1). Then the utility at the optimum solution (indirect utility function) is ...
... The greater the k, the greater the degree of differentiation. Church and Gandal (1992) did not define the meaning of f and only supposed that f.k in order that U (x 1 , x 2 , Á Á Á x m ).0. 3 Further, Church and Gandal (1992) assume that the consumer's budget constraint is P i r i x i = y À p h , where y is the total budget for platform and suppliers, p h is the price of platform h (provided consumers only buy one unit of platform), and r i is the price of supplier i, and the consumer chooses the supplier combination x 1 , x 2 , :::, x m ð Þto maximize (1). Then the utility at the optimum solution (indirect utility function) is ...
Plain Language Summary
The Evolutionary Game of Platform Competition
The purpose of this paper is to analyze the equilibrium state of platform competition in a dynamic market from a tripartite perspective of platform-supplier-consumer. This paper constructs a game model that includes platforms, suppliers, and the final consumers. We analyze the condition and stability of each equilibrium and the impacts of the characteristics of the core and complementary products on the equilibrium by using the method of evolutionary game. Our results show the following: (1) If the two platforms initially have separate advantages in terms of the number of suppliers or consumers, there will be an equilibrium of the coexistence of the two platforms; otherwise, there will be an equilibrium of single platform dominating. (2) The equilibrium of a single platform dominating is more stable than that of the coexistence of multiple platforms. (3) The equilibrium of coexistence is more easily broken by the occasional shock of increasing or decreasing the number of suppliers than by consumers. (4) Platforms with poor core product quality and a high price for core and complementary products can coexist with other superior platforms only if the former has more consumers and suppliers at the beginning of the competition. This paper not only enriches the research content in the field of platform competition, but also provides new ideas for them to develop appropriate competition strategies in combination with their own conditions. The limitation of this paper is that it does not consider the possibility of having companies enter or exit the industry.
... Network effect is one of the key factors for plat-form development and growth, including the same-side network effect and crossside network effect (Boudreau & Jeppesen, 2015;Parker & Van Alstyne, 2005;Shankar & Bayus, 2003). The same-side network effect means that the increase of the number of users on one side of the platform will affect the utility of users on the other side (Church & Gandal, 1992). The cross-border network effect is that the increase of the number of users on one side of the platform will affect the utility of users on the other side (Church & Gandal, 1992). ...
... The same-side network effect means that the increase of the number of users on one side of the platform will affect the utility of users on the other side (Church & Gandal, 1992). The cross-border network effect is that the increase of the number of users on one side of the platform will affect the utility of users on the other side (Church & Gandal, 1992). The existence of network effects has an important impact on the behavior of platform participants (Zhu & Iansiti, 2012). ...
... As for the research of platform network effect, the current literature mainly focuses on the traditional e-commerce platform and software development platform (Chu & Manchanda, 2016), explores the impacts of the same-side network effect (direct network effect) and cross-side network effect (indirect network effect or cross-network effect) on platform operation (Afuah, 2013;Church & Gandal, 1992;Dubois & Gadde, 2000;Parker & Van Alstyne, 2005). For example, Chu and Manchanda (2016) has studied the direct network effect and cross-border network effect on the Taobao platform. ...
... To reconcile these competing ideas, we use a decision rule suggested by Church and Gandal (1992): to increase net software demand, the network effect of new platform users must be greater than the competitive effects among software products. With empirical tests, we can determine the sizes of both the direct cannibalization impact (Path A) and the indirect impact (Paths B and C) from new platform adopters, then calculate the overall net impact. ...
... But we also consider the characteristics of the new software entrant that might determine the strength of the direct and indirect impacts. Any new entrant increases the size of the software portfolio and thus should incrementally increase platform attractiveness and sales (Stremersch et al. 2007); however, to overcome cannibalization, the new software entrant needs to generate so many new platform adopters, who then purchase so much incumbent software that they create an overall net halo effect (Church and Gandal 1992). It is likely that only software that is highly valued will attract a sufficient number of new platform adopters to overcome cannibalization. ...
Platform markets involve indirect network effects as two or more sides of a market interact through an intermediary platform. Many platform markets consist of both a platform device and corresponding software. In such markets, new software introductions influence incumbent software sales. New entrants may directly cannibalize incumbents. However, entrants may also create an indirect halo impact by attracting new platform adopters, who then purchase incumbent software. To measure performance holistically, this article introduces a method to quantify both indirect and direct paths and determine which effect dominates and when. The authors identify relevant moderators from the sensations–familiarity framework and conduct empirical tests with data from the video game industry (1995–2019). Results show that the direct impact often results in cannibalization which generally increases when the entrant is a superstar or part of a franchise. For the indirect halo impact, superstar entrants significantly increase platform adoption, which can help all incumbents. Combining the direct and indirect impacts, only new software that is both a superstar and part of a franchise increases platform adoption sufficiently to overcome direct cannibalization and achieve a net positive effect on incumbent software; all other types of entrants have a neutral or negative overall effect.
... The emergence of studies on digital platform ecosystems has encouraged researchers to scrutinize the decision-making processes that drive complementary autonomous agents to join a platform (Boudreau, 2010;Church and Gandal, 1992;Gawer and Henderson, 2007;Zhu and Iansiti, 2012). Most existing studies on how platforms attract complements often assume that they possess detailed information on the participants, the technologies involved in the regulatory issues related to data governance, or the ecosystem's value proposition. ...
... This is determined by three possible issues. First, if standards can differ from each other, the platforms may co-exist independently in the same market (Chou and Shy, 1990;Church and Gandal, 1992). Second, if an agent can use multiple standards at the same time, they are more likely to co-exist, while if there are heavy and high fixed costs tied to using one single platform the market will be less fragmented (Rysman, 2009). ...
The digitisation of the media industry has caused a strong decentralisation of logics of the past, towards more open, flexible structures, bringing about both opportunities and challenges. Within the market where Swedish commercial broadcasters operate, 2014 brought about great disruption in video consumption and advertising patterns. The purpose of our research is to identify the current patterns of change in the market, to analyse them with the help of theory and to describe how the defined shaping forces are affecting market strategies of commercial broadcasters. Patterns of change have been identified through the help of a background research across different media industries affected by digitisation, and confirmed by a set of qualitative interviews with industry professional. Afterwards, theory was selected with a context-based approach, to analyse how interactions on three different levels affect market strategies (firm-to-customer, firm-to-firm and society-to-firm level). The resulting framework served as a guide to carry out the main study. Several strategy experts in different fields within the industry where commercial broadcasters operate were interviewed to analyse how market changes are affecting market strategies. According to the results of our main study, new technology and new actors have formed a new emergent market, characterised by increased competition, lowered power of traditional players and undefined boundaries. There is a will to align the currencies of linear and digital advertising offers by means of common measurement standards, but the agreement process is hard and time-consuming. The resulting market is therefore fragmented both in terms of platforms and in terms of audience. With reference to institutions, regulations have become obsolete and hard to enforce, due to decreased geographical boundaries and to the open character of the digital environment. Audiences are moving towards digital platforms disrupting not only viewing but advertising pattens (due to changing audience levels).
... The application gathers the suppliers and the demanders, which has a scale effect and a network effect and also has cross-group positive externalities (8). As a digital platform, after breaking through a certain user scale, its development will be accelerated by the three effects mentioned earlier (9)(10)(11)(12). However, as a highly regulated industry, the establishment and development of the platform are heavily influenced by the licensing policy (13)(14)(15). ...
Introduction
As a form of platform economy, telemedicine is not growing as fast as other digital platforms. The existing literature seldom pays attention to how licensing policy affects the development of telemedicine platform models.
Methods
This paper uses the method of multi-case study and the theory of policy implementation as mutual adaptation to research the influence mechanism of telemedicine platform licensing policy on the platform model in China.
Results
The findings of the current study are as follows: (1) three models can be classified in accordance with different platform providers in China: medical institution platform, Internet company platform and local government platform; (2) bargaining power, reputation mechanism and resource specificity are important dimensions in the analysis of platform models; (3) as an implementer in the process of licensing policy, the platform provider can not only directly determine the establishment and formation of platform model but also indirectly affect the sustainable development of platform model by affecting the supplier and the demander of platform; and (4) The impact between licensing policy and platform model is dynamic and bidirectional, mainly exerted via administrative orders, market-oriented mechanism and medical insurance.
Conclusions
The research enlightens practical exploration in telemedicine and enriches the theoretical innovation in platform.
... The focal point when discussing platform competition remains network externalities [65]. Some important works in which the relationship between competition and network externalities for platforms were established, are Katz and Shapiro [43] and Church and Gandal [21]. Later research problems often use these models as their foundation [65]. ...
Two-sided platforms enable and supplement transactions between buyers and sellers. We consider a decision problem facing two such platform firms competing in a market. Each firm needs to divide its budget of a planning period between promotion towards attracting new sellers and new buyers. We propose a generalized Nash equilibrium problem (GNEP) model to find optimal allocations. The GNEP approach provides an eloquent framework for analysis and theory development. An intuitive result from the interpretation of optimality conditions is that a firm’s focus should be higher towards the group whose presence is less on the platform. This focus can shift depending on competitors’ ability to dissuade new customers. Interestingly, the model recommends that a firm should focus on getting new sellers when its customer-focused promotion adversely impacts competitors’ customer acquisition. Predatory promotion strategy adversely affects both. More useful implications can be drawn from the equilibrium analysis. We have assumed that a limited number of sellers are available in the market, whereas no restrictions are imposed on new customer acquisitions. This situation is typical during the entry phase of a two-sided platform.
... A number of studies (exp. Church /Gandal 1992;Farrell/Saloner1985, 1986, and many more) suggested importance of stranding concerns and extrinsic benefits in providing companies with an ability to utilize network externalities even in the environments that is defined by open standards. Or, on the other side, an existence of proprietary standard secures market power by helping eliminate close substitutes and drive network market toward monopolist competition. ...
This paper reviews selected empirical literature most relevant to network economy. Our selection includes empirical studies assessing network effects and strategies in different sectors and industries. Since network effects-the increase in value of consuming a product if many consumers use the same product-are a feature of many markets and in particular of many high-technology products, we have tried to include a wide variety of empirical literature over the past decades and to make a user-friendly guide for future researches in this important field. Our intention is not to steer future researchers in any particular direction, but to emphasize the need for closer analysis of the consumer interactions and the decision-making process in network industries, as well as better understanding of how network effects operate.
... The modern incarnation of the literature on network effects is typically associated with Arthur (1989), Katz and Shapiro (1985), and Farrell and Saloner (1986). The first theoretical models of indirect network effects are Church and Gandal (1992), as well as Chou and Shy (1990). An important overview of this earlier work is Farrell and Klemperer (2007). ...
The chapter has ten sections, which cover the theory of two-sided markets and related empirical work. Section 1 introduces the reader to the literature. Section 2 covers the case of markets dominated by a single monopolistic firm. Section 3 discusses the theoretical literature on competition for the market, focusing on pricing strategies that firms may follow to prevent entry. Section 4 discusses pricing in markets in which multiple platforms are active and serve both sides. Section 5 presents alternative models of platform competition. Section 6 discusses richer matching protocols whereby platforms price-discriminate by granting access only to a subset of the participating agents from the other side and discusses the related literature on matching design. Section 7 discusses identification in empirical work. Section 8 presents approaches to estimation. Section 9 discusses estimation in empirical work. Finally, Section 10 concludes.
... Indirect network externalities affect diffusion processes through the effect on adopters' utility of the combined use of two complementary goods, such as MSN and Smartphones. Early studies identified the relevance of indirect network externalities 13 on systems such as application software and operating systems (Church & Gandal, 1992) and video players and DVDs (Dranove & Gandal, 2003). This paper focuses on indirect network externalities due to the systems composed by MSN and Smartphones. ...
The early diffusion of mobile social networking (MSN) reflected the interplay of different factors: the affordability of better Internet connectivity and the diffusion of Smartphones suitable for Social Networking Applications. These key technology and cost drivers facilitated both the direct and indirect network externalities, which are necessary to overtake critical adoption barriers and facilitate users' decisions. However, a key challenge in modeling MSN diffusion is in distinguishing among the impact of these two types of network externalities. This paper addresses such a challenge by adopting a two-stage estimation strategy. In the first stage, we focus on direct network externalities by estimating a set of country-specific adoptions peaks that allow differentiating between early and late adopters. In the second stage, we estimate the impact of indirect network externalities on MSN diffusion while also considering the role of pricing strategies. Our results provide significant evidence that indirect network externalities can exert opposite effects on adoption between early adopters and followers, depending on whether they adopt before or after a country's MSN diffusion peak.
... The analysis also found negative cross-side interactions between user adoption and expected numbers of companies (Section 3.2). This result adds to prior findings of negative network effects (e.g., Church and Gandal 1992, Economides 1996, Augereau et al. 2006, Tucker and Zhang 2010, and is notable for being consistent with the platform's institutional design, supporting collaborative challenges. ...
... Lock-in can be achieved through sunk costs (Parayre, 1995), such as when suppliers invest in product development that meets a customer's unique needs but that is less useful to other customers. It is also illustrated through the activation of network externalities (Church and Gandal, 1992;Shapiro, 1985, 1992;Sheremata, 2004;Suarez, 2005) such as the use of social media like Facebook. The more people use it, the more value it provides to its members, who become discouraged from migrating to an alternative. ...
Purpose-The purpose of this paper is to investigate the omnichannel practices to propose a conceptual overview to offer guidance on how to handle their inherent complexities.
Design/methodology/approach-This study is based on a literature review of more than 100 academics papers about the multichannel practices and omnichannel practices in the global market.
Findings-To this end, this paper identifies and addresses three limitations of the contemporary omnichannel literature: the failure to articulate the sources of value creation generated by omnichannel practices, the conception of omnichannel as targeting a single customer actor only and the static conception of omnichannel practices. In response to these limitations, this study offers the following: four sources of value creation based on the business model concept, a multi-actor customer conception, where several actors partake in the overall purchase decision and an evolutionary notion of omnichannel practices in terms of their constitution and use as part of the overall evolution of a marketplace.
Originality/value-The framework presented in this paper provides a map to take new research beyond its current boundaries and an audit tool to help managers identify their firm's current omnichannel situation, including limitations and opportunities for further development.
... Collaborative Contest Platform Apart from main findings, a secondary finding here is of a negative cross-side interaction between the expected numbers of companies and user adoption (Section 3.2). This result adds to prior findings of negative network effects (Church and Gandal 1992, Economides 1996, Augereau et al. 2006, Tucker and Zhang 2010, Boudreau, 2017. The result here, however, is notable as it relates to a platform designed around team-based contests issued by companies. ...
A platform might have the potential to bring enormous value to its users. However, without a well-orchestrated launch strategy that coordinates a sufficient number of users onto the platform, this potential will not be realized. The theoretical literature predicts that one approach to coordinating platform take-off is to influence the market’s subjective focal expectations of the future installed base of users. This paper reports on a field experiment investigating the causal role of subjective expectations in the launch of a new platform venture, in which invitations to join a newly launched platform were sent to 16,349 individuals. The invitations included randomized statements regarding the size of the future expected installed base (along with disclosures of the current installed base). I find that simple, subjective, uncommitted, and relatively costless statements broadcasted by the platform with the goal of influencing market expectations were indeed able to influence platform takeoff and overcome an initial chicken-and-egg problem. These broadcasted subjective statements regarding future installed base had a larger influence on adoption rates than did disclosures of the true current installed base during early adoption. However, these subjective statements of expected future installed base ceased to have any effect once the true current installed base grew large. I discuss implication for the promotion, marketing, and evangelism of new platform ventures.
This paper was accepted by Duncan Simester, marketing.
... First, we evaluate the theoretical mechanisms that link network effects, UGC, and firm value in extended organizations. A long tradition of research examines network effects in the context of diffusion of innovation (Abrahamson and Rosenkopf 1997), technology adoption (Shankar andBayus 2003, Suarez 2005), platform competition (Church andGandal 1992, Eisenmann et al. 2014), market entry decisions (Chintakananda and McIntyre 2014), and organizational performance (Farrell and Klemperer 2007). ...
Business models increasingly depend on inputs from outside traditional organizational boundaries. For example, platforms that generate revenue from advertising, subscription, or referral fees often rely on user-generated content (UGC). But there is considerable uncertainty on how UGC creates value—and who benefits from it—because voluntary user contributions cannot be mandated or contracted or its quality assured through service-level agreements. In fact, high valuations of these platform firms have generated significant interest, debate, and even euphoria among investors and entrepreneurs. Network effects underlie these high valuations; the value of participation for an individual user increases exponentially as more users actively participate. Thus, many platform strategies initially focus on generating usage with the expectation of profits later. This premise is fraught with uncertainty because high current usage may not translate into future profits when switching costs are low. We argue that the type of user-generated content affects switching costs for the user and, thus, affects the value a platform can capture. Using data about the valuation, traffic, and other parameters from several sources, empirical results indicate greater value uncertainty in platforms with user-generated content than in platforms based on firm-generated content. Platform firms are unable to capture the entire value from network effects, but firms with interaction content can better capture value from network effects through higher switching costs than firms with user-contributed content. Thus, we clarify how switching costs enable value for the platform from network effects and UGC in the absence of formal contracts.
... Competition between platforms is one of the most developed areas of platform ecosystem research, though early work in this domain more commonly used the phrase "standards battles" or "standards competition" (e.g., Church & Gandal, 1992;Cusumano, Mylonadis, & Rosenbloom, 1992;Schilling, 2002;Shapiro & Varian, 1999). This line of work typically focused on how platforms use price (e.g., Brynjolfsson & Kemerer, 1996;Gandal, 1994;Parker & Van Alstyne, 2005), investments in quality (e.g., Choi, 1994), and subsidization or provision of complements (Kretschmer & Claussen, 2016;Rietveld & Lampel, 2014;Riggins, Kriebel, & Mukhopadhyay, 1994;Schilling, 2003) to their advantage given strong network externalities. ...
Research summary
Platform ecosystems have spurred new products and services, sparked innovation, and improved economic efficiency in various industries and technology sectors. A distinctive feature of the platform architecture is its modular and interdependent system of core and complementary components bound together by design rules and an overarching value proposition. Accordingly, we conceptualize platforms as meta‐organizations, or “organizations of organizations” that are less formal and less hierarchical structures than firms, and yet more closely coupled than traditional markets. To function successfully, however, platforms require coordination among multiple participants not all of whose interests are aligned. These organizational features of platforms raise many interesting and complex strategic challenges and hold implications for how platforms compete. In this paper, we discuss some of the most salient features of platform ecosystems as meta‐organizations, specifically in terms of the sources of authority or power in the ecosystem, the motivation and incentives a platform creates to attract participants, and its governance and coordination structures. We then consider how papers appearing in this special issue inform us about the effects of these features on platform competition along three distinct dimensions: (a) with traditional incumbents as platforms enter and establish themselves in new markets, (b) with other platforms to secure an advantageous market position, and (c) with the different participants on the platform to share the value that has been created jointly. We close by identifying some promising directions for future research.
Managerial summary
Platform ecosystems have spurred new products and services, sparked innovation, and improved economic efficiency in various industries and technology sectors. A distinctive feature of the platform architecture is its modular and interdependent system of core and complementary components bound together by design rules and an overarching value proposition. This makes platform ecosystems an organizational form on its own (a “meta‐organization”), neither possessing the hierarchical instruments of a firm, nor the largely uncoordinated decisionmaking of markets. Successful platform ecosystems require coordination among multiple participants with possibly conflicting interests. We discuss some of the most salient features of platform ecosystems as meta‐organizations, specifically in terms of the sources of authority or power in the ecosystem, the motivation and incentives a platform creates to attract participants, and its governance and coordination structures. These features affect how platform ecosystems compete: i) with a traditional incumbent, ii) with other platform ecosystems, and iii) between different participants of the same platform ecosystem. The articles published in this special issue speak to different aspects of platform competition from the perspective of organization design.
... ---INSERT FIGURE 1 ABOUT HERE ---Research on platform competition has its bedrock in economics. Concepts like network externalities (Church & Gandal, 1992;Katz & Shapiro, 1985, increasing returns and lock-in effects (Arthur, 1989;David, 1985), compatibility (Farrell & Saloner, 1985), and systems competition (Katz & Shapiro, 1994) form the basis for the bulk of the research conducted on platform competition. Not surprisingly, these early studies are among the highest cited articles in our sample. ...
Over the past three decades, platform competition—the competition between firms that facilitate transactions and govern interactions between two or more distinct user groups who are connected via an indirect network—has attracted significant interest from the fields of management and organizations, information systems, economics, and marketing. Despite common interests in research questions, methodologies, and empirical contexts by scholars from across these fields, the literature has developed mostly in isolated fashion. This article offers a systematic and interdisciplinary review of the literature on platform competition by analyzing a sample of 333 articles published between 1985 and 2019. The review contributes by (a) documenting how the literature on platform competition has evolved; (b) outlining four themes of shared scholarly interest, including how network effects generate “winner-takes-all” dynamics that influence strategies, such as pricing and quality; how network externalities and platform strategy interact with corporate-level decisions, such as vertical integration or diversification into complementary goods; how heterogeneity in the platform and its users influences platform dynamics; and how the platform “hub” orchestrates value creation and capture in the overall ecosystem; and (c) highlighting several areas for future research. The review aims to facilitate a broader understanding of the platform competition research that helps to advance our knowledge of how platforms compete to create and capture value.
... ---INSERT FIGURE 1 ABOUT HERE ---Research on platform competition has its bedrock in economics. Concepts like network externalities (Church & Gandal, 1992;Katz & Shapiro, 1985, increasing returns and lock-in effects (Arthur, 1989;David, 1985), compatibility (Farrell & Saloner, 1985), and systems competition (Katz & Shapiro, 1994) form the basis for the bulk of the research conducted on platform competition. Not surprisingly, these early studies are among the highest cited articles in our sample. ...
Over the past three decades, platform competition—the competition between firms that facilitate transactions and govern interactions between two or more distinct user groups who are connected via an indirect network—has attracted significant interest from the fields of management and organizations, information systems, economics, and marketing. Despite common interests in research questions, methodologies, and empirical contexts by scholars from across these fields, the literature has developed mostly in isolated fashion. This article offers a systematic and interdisciplinary review of the literature on platform competition by analyzing a sample of 333 articles published between 1985 and 2019. The review contributes by (a) documenting how the literature on platform competition has evolved; (b) outlining four themes of shared scholarly interest, including how network effects generate “winner-takes-all” dynamics that influence strategies, such as pricing and quality; how network externalities and platform strategy interact with corporate-level decisions, such as vertical integration or diversification into complementary goods; how heterogeneity in the platform and its users influences platform dynamics; and how the platform “hub” orchestrates value creation and capture in the overall ecosystem; and (c) highlighting several areas for future research. The review aims to facilitate a broader understanding of the platform competition research that helps to advance our knowledge of how platforms compete to create and capture value.
... 3 Further examples may be given: video games consoles (Nintendo secured a near-monopoly after driving Atari out of the market); personal computers (early on, IBM and Macintosh computers were not compatible); digital music systems such as digital compact cassette and mini disc; operating systems (Microsoft's DOS was chosen over Apple's). For more details, see Church and Gandal (1992), Cusumano et al. (1992), Katz and Shapiro (1986), and Rohlfs (2003), Liebowitz and Margolis (1994), and Shy (2001). rural areas (say in parts of the U.S. Midwest) or electric automobiles (networked via their associated charging stations). ...
This paper investigates the effects of exogenous entry on market performance, and the profitability and welfare effects of horizontal mergers in symmetric Cournot oligopolies with firm-specific network effects. With strategic substitutes in the Cournot part of the model, per-firm output is declining in the number of firms, but industry output, price, per-firm profit, consumer surplus and social welfare may go either way in response to entry. We identify respective sufficient conditions for each possibility. The counter-intuitive conclusions tend to require strong network effects. We study the scope for profitability of mergers and the associated welfare effects. In a general analysis, we provide a sufficient condition on inverse demand for a merger to be profitable, which amounts to requiring strong network effects. Under the condition that leads to higher industry output with entry, mergers are always social welfare-enhancing.
... Reduces cost of fuel for users of vehicles, increases profits; first-mover advantage within a niche market Product-service system Tukker and Tischner (2006); Reim et al. (2015) Specific configuration of goods and services that complement each other and fit the customer needs Customer needs diagnosis, truck and service customization, driver training and coaching, vehicle monitoring, maintenance, and adjustments Strategic capabilities Penrose (1959); Wernerfelt (1984); Barney (1991) Unique and hard to imitate resources that reduce the firm's costs or increase revenues Development and maintenance of telematic and digital functionalities, offering customizations and training services, and then integrating them with conventional industry offerings Dynamic capabilities Teece et al. (1997); Teece (2007) Sensing and shaping opportunities and threats, seizing opportunities, and maintaining competitiveness by enhancing and reconfiguring assets Identified and seized opportunities for digital technology use and the needs for sustainable transportation solutions; acquired and configured novel resources to develop new capabilities Strategic networks Katz and Shapiro (1985); Gulati et al. (2000) In the interaction between a focal firm and their external actors rather than inside the focal firm More than 50% of TruckCo's value is generated by external actors Direct network effects Church and Gandal (1992); Farrell and Saloner (1985); Sheremata (2004) The more external actors use an offering, the more value it offers them Drivers generate best practice patterns shared with other drivers to improve their driving, which creates value for both customers and the provider Data network effects Gregory et al. (2020) The more the focal firm learns from the data about the use of the offering, the more valuable the offering becomes to users ...
Industrial firms seek to develop offerings that can reduce their negative ecological impact while still being economically viable. Initial studies of these offerings focused on the what and the why. Only recently have studies addressed how to pursue these efforts. The literature generally ignores the underlying mechanisms of how such offerings are created and operated. This paper reports a longitudinal case study of an industrial firm's innovative offering. This offering combines heavy duty vehicles and related services for long-haul transportation. It enables road transportation firms to reduce fuel consumption by one quarter and thereby cut CO2 emissions and fuel costs. A multi-theoretical investigation of that offering contributes to the literature by providing: (i) a rich characterization of an industrial organization's offering that combines economic viability with a much lower negative environmental impact; (ii) a chain of underlying mechanisms that enable such an offering to emerge, including activation of institutional entrepreneurship for industrial entrepreneurship; and (iii) an articulation of the value of using multi-theoretical inquiries of ecological industrial offerings instead of seeking a new isolated theory.
... But even though ecosystems are always changing, if centripetal and centrifugal forces are in balance, the "Martian's view" will not change very much. Some members of an ecosystem will prosper and grow while 65 Arthur (1989); Church and Gandal (1992;. 66 Zhu and Iansiti (2012). ...
The purpose of this chapter is to introduce two new building blocks to the theory of how technology shapes organizations. The first is a new layer of organization structure: a business “ecosystem.” The second is the economic concept of “complementarity.” Ecosystems are groups of autonomous firms and individuals whose actions and investments create joint value. Ecosystems are defined by economic complementarities among their members: the value they create acting together is greater than the value they can create acting separately. The modern theory of complementarity thus helps to explain when and why ecosystems survive in the greater economy.
In the first half of this chapter, I define business ecosystems and show how they are related to task networks, transactions, transaction free zones, and corporations. I then describe the methods by which ecosystems are coordinated. The second half of the chapter investigates how economic complementarities influence ecosystems. Within ecosystems, centripetal forces “pull” firms together giving them incentives to combine. Conversely, centrifugal forces “push” firms apart providing incentives to remain separate. The continued existence of an ecosystem requires a balance of these forces, so that the system neither collapses into several large firms nor dissipates into a group of unrelated firms. In the final sections of the chapter, I identify necessary mathematical conditions for an ecosystem to survive as a dynamic equilibrium in the larger economy.
... Technology diffusion has been characterized as a "complex contagion," defined as a behavior that only spreads when prospective adopters are exposed to multiple sources of social influence (Centola & Macy, 2007). Because digital platforms exhibit network effects (Church & Gandal, 1992), they are particularly likely to be subject to such threshold-based adoption dynamics (Granovetter, 1978). Current diffusion research takes a strong interest in identifying interaction structures that spread complex contagions (Assenova, 2018;Beaman, BenYishay, Magruder, & Mobarak, 2018). ...
Research Summary
Software platforms create value by cultivating an ecosystem of complementary products and services. Existing explanations for how a prospective complementor chooses platforms to join assume the complementor has rich information about the range of available platforms. However, complementors lack this information in many ecosystems, raising the question of how complementors learn about platforms in the first place. We investigate whether attending a temporary gathering—a hackathon—impacts the platform choices of software developers. Through a large‐scale quantitative study of 1,302 developers and 167 hackathons, supported by qualitative research, we analyze the multiple channels—sponsorship, social learning, knowledge exchange, and social coordination—through which hackathons serve as a social forum for the diffusion of platform adoption among attendees.
Managerial Summary
A software platform such as Windows, iOS, or Amazon Web Services relies on third‐party developers to create applications that complement the platform and make it valuable for end users. However, developers face a wide range of possible platforms, and they may have limited information about which platforms would be worthwhile to develop for. A software platform business can educate and encourage developers to adopt their platform by supporting in‐person software development competitions, known as hackathons. Developers learn about prospective platforms that advertise at the hackathon. Developers also learn whether and how to use a platform by observing and teaching one other. Hackathons are particularly useful for spreading platform technologies: developers prefer to adopt widely‐used platforms, and hackathons permit developers to identify and join fashionable platforms.
... Two related streams of literature acknowledge the countervailing forces affecting platform complementors and users. First, the stream of literature studying the long run convergence into one or multiple platforms, which often focuses on market, rather than firm, features, such as preferences of variety or product differentiation (Church and Gandal, 1992, Economides, 1996, Ellison and Fudenberg, 2003, Karle et al., 2020. Second, a smaller body of literature identifies the tension between business stealing and network effects across competitors (Augereau et al., 2006, Boudreau, 2012, Haviv et al., 2020, Panico and Cennamo, 2020, Marra, 2021, Raj, 2021. ...
... Nous avons vu que le logiciel était un bien non-rival (Weber, 2000 ;Horn, 2007 « Software is a network good, prone to network externality phenomena (Church & Gandal, 1992). The users of a software solution are the nodes of a two way-virtual network (Economides, 1996;Economides & White, 1994) that allows them to benefit from a flow of files, documentation and knowledge. ...
L’open source transforme les façons dont les entreprises créent et s’approprient de la valeur. Les entreprises qui décident d’adopter une stratégie open source acceptent d’ouvrir leur processus d’innovation, d’être en interaction renforcée avec les clients et les utilisateurs, de partager les résultats de l’innovation avec le plus grand nombre, sans discrimination et ce, de manière souvent gratuite. Ces éléments participent à changer la manière dont les entreprises font des affaires. Pour appréhender ces changements, nous adoptons deux perspectives différentes mais complémentaires. Dans un premier temps, nous utilisons le concept de business model pour comprendre comment les porteurs de projets open source parviennent à articuler des degrés différents d’ouverture de l’innovation avec des formes types de valorisation. Nous approchons la création et l’appropriation de valeurs de ces acteurs de façon absolue, avec une réflexion axée sur le niveau du projet. Dans un second temps, nous allons plus en amont de l’open source et observons la manière dont des contributeurs concurrents d’une même communauté de coopération parviennent à créer et à s’approprier de la valeur. Nous mobilisons pour cela le concept de coopétition et adoptons une vision plus relative de la création et de l’appropriation avec une réflexion axée sur le niveau inter-organisationnel.Nous adoptons une méthodologie de recherche mixte avec une première étude quantitative qui nous permet de dégager trois business models de projets open source types. À partir de ces trois catégories, nous sélectionnons les cas de notre étude qualitative qui porte sur la coopétition au sein des communautés open source.Nos résultats permettent de qualifier trois types de business models de projets : les projets d’exploration, d’expertise et d’optimisation. Nous montrons ensuite comment les choix effectués par les porteurs de projets dans le cadre de ces business models agissent sur la situation coopétitive des entreprises qui vont venir contribuer aux communautés de ces mêmes projets. Nous décrivons une situation de coopétition dans laquelle la création de valeur entre coopétiteurs est intermédiée par le porteur de projet. Nous montrons que cette création de valeur est extensive dans la mesure où les coopétiteurs ne peuvent choisir avec quelles entreprises elles vont coopérer. Surtout, nous soulignons que l’ouverture de l’innovation, la non-discrimination et la gratuité n’altèrent en rien les capacités d’appropriation des coopétiteurs. Cette appropriation est simplement détournée sur des objets de valeurs que nous qualifions précisément. Finalement, nos résultats permettent de montrer que l'open source est propice à l’instauration de situations coopétitives et que les entreprises qui s’y engagent peuvent y trouver de nombreux bénéfices.
In choosing healthcare services, price and waiting time are two important factors that matter to patients. Price is set by healthcare providers, while waiting time is usually endogenously determined by patient choice and the healthcare provider’s capacity investment. We study the pricing and capacity design for profit-driven hospitals offering two types of healthcare services—regular and premium—serving heterogeneous patients who choose from either of the two types of services. Patients make their choices based on both price and endogenously determined equilibrium waiting time. We then benchmark profit-driven hospitals to welfare-driven hospitals to reveal how the behaviors of for-profit hospitals deviate from the socially optimal outcomes in patients waiting, service capacity, and price. We find that fewer patients are treated by premium services in profit-driven hospitals, and thus profit-driven hospitals invest less in premium service capacity and charge a higher premium for premium services than welfare-driven hospitals. These inefficiency distortions exist in profit-driven hospitals primarily because they are incentivized to differentiate between the waiting times of the two types of service to induce patients to pay a higher premium for premium services. Our results also show that if the inefficiency in patient partition is corrected, profit-driven hospitals would choose the welfare-maximizing level of premium service capacity and thus achieve socially optimal results. However, we also find that regulations such as price ceiling and capacity regulation cannot fully correct the inefficiency in patient partition and capacity decisions of profit-driven hospitals. Lastly, the model is extended in several ways to ensure robustness.
Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms’ responses. (JEL D22, D85, L14, L15, L84)
This paper examines the effect of the number of sellers of a good on buyers’ demand, using an extensive dataset from an e-commerce platform (PriceMinister.com) in France. Accounting for seller and product characteristics constitutes variety amongst the same product. Although buyers may prefer a wide variety, it can introduce a search cost. Using a flexible semiparametric specification, I find that the demand of buyers does not monotonically increase in relation to the number of sellers (variety), contrary to assumptions in the literature. I illustrate the consequences of misspecification of these network effects through a counterfactual simulation.
Aim. The presented study aims to develop recommendations aimed at optimizing the entrepreneurial activity of a marketplace. Tasks. The author briefly describes the functioning of a marketplace; justifies the classification of the marketplace as a two-way platform; identifies and formalizes platform management tools; determines approaches to pricing; substantiates the need to choose different strategies depending on the stage of the marketplace lifecycle. Methods. Based on the performed analysis, the author uses Tirol and Roche's basic model of bilateral platforms, the concepts of subsidized pricing and price discrimination in combination with the basic methodological approaches of entrepreneurship theory. Results. Additions are made to the definition of the concept of marketplace, and the viability of considering it as a bilateral platform is substantiated. The study highlights and formalizes business management tools in the bilateral market, identifies the most effective approaches to pricing and substantiates the need to apply different strategies at different stages of the marketplace lifecycle. The author develops recommendations aimed at optimizing the entrepreneurial activity of the marketplace. Conclusions. Marketplace is actually a bilateral platform. At different stages of its lifecycle, different strategies are needed to optimize different indicators. It seems appropriate to use a subsidized pricing model.
Network effects are a key economic and strategic phenomenon in ‘new economy’ industries. They can, but do not necessarily, lead to market tipping, unless they outweigh customers’ benefits from differentiation and are accompanied by high switching and multi-homing costs. Network effects create the possibility for multiple equilibrium market configurations, which are crucially determined by market participants’ expectations. While in some markets network effects are exogenously given, in other markets their existence and magnitude is endogenously determined by firms’ strategic choices.
The competition policy mechanisms in specific sectors of the economy work out, provided that balanced protection tools are used, and incentives are maintained to launch a new product or technology onto the market. However, strong network effects lead to the presence of a small number of manufacturers or even a single player, which hinders the spread of alternative products and contributes to a single product network formation. The relevance of this research is driven by the need to competition analysis in the software market affected by the network effects. The purpose of this review article is to justify the need for a compound impact analysis of network effects, critical mass and standardization as an assessment optimization tool of the competition state in the two- sided software market, specifically in the operating systems markets. The object of the research is an operating system itself, and the subject is the influence of network effects, critical mass and standardization on competitive processes in the operating systems market. The following issues were performed: the results systematization of theoretical studies and approaches to econometric modeling of network externalities, the strategies identification for analysis of standards and installed base of users and sales, introduction of the operating system and software concepts, the development of recommendations for analysis of the phenomenon of network effects with an emphasis on the standardization process in the furtherance of competition and industrial policy. Analysis of the examined phenomena impact shows that the introduction of a generally accepted network effects definition at the legislative level, distinction between the direct and indirect network effects, consideration of this phenomenon as a barrier to entry into the market, and concord of the network effects and standard setting theory can decrease the possibility of type I and II errors in the law enforcement practice.
With the presence of both switching cost and network externality, this paper builds a two-stage model for competition between two platforms. In stage one, an incumbent platform controls the market as a monopolist and sets a price to acquire a user base. In stage two, a new platform enters the market to compete against the incumbent. We consider a non-strategic competitor with a free product in the benchmark model and also extend the model to allow for a strategic competitor. Our main results show: (1) When the switching cost is relatively high and the network externality is relatively low, the first mover adopts a closed strategy by maintaining a high price in stage two and harvesting profits from its original users. (2) When the switching cost is relatively low and the network externality is relatively high, the first mover adopts an open strategy by setting a low price to acquire more users in stage two, and the first-mover advantage based on the presence of switching cost will become ineffective. Our work rationalizes the coexistence of high competition and high concentration in a market with strong network externality, and thus provides a reasonable explanation for the existing paradox: even though the internet industry is much more competitive than traditional industries, the concentration level of internet industry is still higher than that of traditional industries.
This paper studies the decentralized adoption of a technology standard when network effects are present. If the new standard is incompatible with the current installed base, adoption may be inefficiently delayed. I quantify the magnitude of “excess inertia” in the switch of the movie distribution and exhibition industries from 35mm film to digital. I specify and estimate a dynamic game of digital hardware adoption by theaters and digital movies supply by distributors. Counterfactual simulations establish that excess inertia reduces surplus by 16% relative to the first-best adoption path; network externalities explain 41% of the surplus loss. Targeted adoption subsidies or a mandate on digital distribution help bridge this welfare gap.
In this paper, we disentangle the changes that the rise of artificial intelligence (AI) technologies is inducing in the semiconductor industry. Chips based on the von Neumann architecture are struggling to deliver performance across a wide range of applications, and the new AI segment is only adding to this struggle. This poses a new challenge to chip design, with flexibility of computation at its core, i.e., hardware’s ability to support a large software variety, rather than computation speed. We identify and analyze forces and mechanisms at work and discuss the product configurations which could characterize the future of the semiconductor industry. We outline two possible scenarios: (i) fragmentation of the semiconductor industry into submarkets with dedicated chips and (ii) the shift of the industry to a system-on-a-chip-based dominant design with the emergence of a new platform chip. We rationalize the unfolding situation by modeling consumer choice between computing systems based on their crucial characteristics—speed, flexibility, and energy efficiency.
A new international instrument is needed to address access to interoperability standards and standards-essential intellectual property, which are critical to maintaining technological advancement and promoting cost-effective solutions for consumers. Applying law and economics methodologies, Simon Brinsmead systematically explores how international and domestic law deals with these matters. This important book includes an examination of the technical and economic nature of interoperability standards; a detailed analysis of the issues arising under intellectual property and competition law; an analysis of whether liability or exclusive property rules should apply with respect to interoperability standards and SEIP; and consideration of feasible international approaches. Finally, Brinsmead includes a draft of his proposed international soft law instrument as a starting point for future discussions in the field. Of interest to lawyers, regulators and scholars, this work offers a meaningful contribution to international governance, harmonization of laws and technological advancement.
This chapter outlines the nature of standards, with a particular focus on interoperability or compatibility standards. Standards in concept are introduced. A typology of standards is provided, which distinguishes between ‘interoperability’ or ‘compatibility’ standards and other types of standards, as well as between formal and de facto standards. The concept of an interoperability or compatibility standard is then examined in more detail. The work then examines and discusses some noteworthy interoperability standards, both from within and outside the field of information and communications technology (ICT). The key fora for the creation of interoperability standards are surveyed. The highly variegated nature of the interoperability standards-setting landscape is emphasized, as well as the relative ease with which standard-setting initiatives can migrate from one forum to another. The economic characteristics of interoperability standards are examined, in particular demand-side economies of scale or ‘network effects’, both direct and indirect (the latter being of primary importance to the work).
Which one of the competing technologies can become the de facto technical standard and under what conditions it can do are two classic questions. Previous studies either ignored the role of complementary suppliers or adopted perfect rationality assumptions, resulting in limited explanatory powers to reality. This study constructs a technology (hardware) selection model involving software vendors and consumers from an ecosystem view. Applying the analysis method of stochastic evolutionary game, three interesting results were found. First, a single technology may become the de facto technical standard, or multiple technologies may coexist. Which equilibrium will emerge depends on the initial state of the game, the performance-price ratio of the two technologies, and the complementarity between hardware and software. Second, it is easier for hardware manufacturers to achieve market monopoly by adopting the strategy of subsidizing software vendors than by improving their own performance-price ratio. Finally, the equilibrium of coexistence may occur in industries where hardware and software are not strongly complementary to each other, and where the development of software is poor. The core mechanism that leads to the coexistence is the inconsistent decision-making pace between consumers and software vendors.
As digital technology evolved under the impetus of Moore's Law, a group of new "exchange" platforms emerged that focused on facilitating transactions and/or communications between different parties. Exchange platforms are characterized by having "sides". The simplest have two sides: buyers and sellers in the case of transaction platforms and senders and recipients of messages in the case of communication platforms. However, many exchange platforms have three, four or more sides. The purpose of this chapter is to place digital exchange platforms in the same theoretical framework as standards-based and logistical platforms. I first define exchange platforms and show how their value can be represented using value structure maps and equations. I then describe the main problem facing platform sponsors: coordinating sides to share the same flow of transactions or messages. Modern digital exchange platforms make use of five critical technologies: (1) crowdsourcing; (2) peer production; (3) search and ad placement; (4) dynamic pricing; and (5) data analysis and prediction. The first two technologies, crowdsourcing and peer production, dramatically expanded the ecosystems of exchange platforms, and are the focus of this chapter. The last three have become the key to value capture by platform sponsors and are treated in the next chapter.
The purpose of this chapter is to lay the groundwork for a comprehensive theoretical investigation of open digital platform systems. To do this, we must first recognize that, although there is a strong family resemblance among all platform systems, there are different types of platforms, each with its own set of technological requirements and challenges. I first develop a taxonomy of open digital platforms. I go on to argue that the success of open platforms and ecosystems in competition with vertically integrated firms gave rise to the “vertical-to-horizontal” transition of the computer industry described by Andy Grove in 1996. In effect, the technology of open platforms not only shaped individual organizations but changed the structure of the entire computer industry.
Indirect network effects are of prime interest to marketers because they affect the growth and takeoff of software availability for and hardware sales of a new product. Although prior work on indirect network effects in the economics and marketing literature is valuable, there are two main shortcomings. First, empirical analysis of indirect network effects is rare. Second, in contrast to the importance prior literature credits to the “chicken-and-egg” paradox in these markets, the temporal pattern (i.e., Which leads to which?) of indirect network effects remains unstudied. Based on empirical evidence of nine markets, this study shows that (1) indirect network effects, as commonly operationalized by prior literature, are weaker than expected from prior literature and (2) in most markets examined, hardware sales “lead” software availability, whereas the reverse almost never happens, contrary to existing beliefs. These findings are supported by multiple methods, such as takeoff and time-series analyses, and fit with the histories of the markets studied herein. For academia, the study identifies a need for new and more relevant conceptualizations of indirect network effects. For public policy, it questions the need for intervention in network markets. For management practice, it downplays the importance of the availability of a large library of software for hardware technology to be successful.
This article examines the structural effects of platform certification on the supply of complementary products. Drawing on the exploratory case of mobile application markets, the article highlights the broader market effects of competing platforms and their certifications on a platform-based complementary product market. The case suggests that platform certifications influence market intermediation, entry barriers, and deployment fragmentation. We present these market effects in a conceptual model that can be applied to understand similar complementary product markets. As such, the article contributes to the literature on compatibility standards by emphasizing some of the complementary product market effects of employing certification in enhancing compatibility.
Two-sided platforms coordinate two types of users in order to increase the value of the whole system surrounding the platform. Users of a platform have different outside opportunities, and these influence their behavior on the platform. Platforms often limit these outside projects through restrictive licensing agreements. These are often thought to reflect market power and a foreclosure motivation, but it shows that they can be a way of managing the “quality commons” aspect of a platform. This chapter analyzes a platform where all component developers produce two kinds of quality—inside quality for their offerings on the platform and outside quality on their outside project. It shows that there are cases where restrictive licensing agreements that shut down the outside projects can increase social welfare, while in other cases they reduce social welfare. The reason is that if consumers and the platform value components inside quality enough, all agents prefer to be protected from low-quality behavior, even at the cost of giving up outside projects.
There are often benefits to consumers and to firms from standardization of a product. We examine whether these standardization benefits can "trap" an industry in an obsolete or inferior standard when there is a better alternative available. With complete information and identical preferences among firms the answer is no; but when information is incomplete this "excess inertia" can occur. We also discuss the extent to which the problem can be overcome by communication.
In the tradeoff between standardization and variety, there can be too much or too little variety. The latter possibility can only happen if there are several equilibria.
This paper relates firm location choice and consumer search. Firms that cluster together attract consumers by facilitating price comparison, but clustering increases the intensity of local competition. The author constructs a simple model which shows that firms may choose head-on competition by locating together. Under reasonable conditions, this is the only equilibrium outcome. Copyright 1990 by American Economic Association.
Bertrand Competition Versus Monopolistic Competition', Foerder Institute for Economic Research Working PaperMonopolistic Competition and Optimal Product Diversity
- J Church
- N 1 Gandal
- A Dixit
- J Stiglitz
CHURCH, J. and GANDAL, N., 1991, 'Bertrand Competition Versus Monopolistic Competition', Foerder Institute for Economic Research Working Paper, 10-9 1. DIXIT, A. and STIGLITZ, J., 1977, 'Monopolistic Competition and Optimal Product Diversity', American Economic Review, Vol. 67, pp. 297-308.
Standardization and Variety', Economic Letters
- J Farrell
- G Saloner
FARRELL, J. and SALONER, G., 1986, 'Standardization and Variety', Economic Letters, Vol. 20, pp. 71-74.
Compatibility Standards, Competition, and Innovation in the Broadcasting IndustryComplementary Network Externalities and Technological Adoption
- S Besen
- L Johnson
BESEN, S. and JOHNSON, L., 1986, 'Compatibility Standards, Competition, and Innovation in the Broadcasting Industry', Report R-3453-NSF, Rand Corporation. CHURCH, J. and GANDAL, N., 1989, 'Complementary Network Externalities and Technological Adoption', B.U. Working Paper 89-20.