From Critical Mass to Key Players: A Network Approach to Platform Design

Abstract

The study generalizes the structure of network effects that is the defining feature of platforms. By adapting graph theory and the micro-foundation from Ballester et al. (2006), I discuss the monetization strategy for platforms that confront the demand with pair-wised network effects (e.g. Facebook). In the model, consumers choose how much (time) to consume in each platform, instead of which one, and their consumption depends on their peers' consumption. The platform(s) then develop the pricing strategy accordingly. The result indicates that depending on the Katz-Bonacich centrality, key players receive lower monopoly prices and larger price cut due to oligopoly competition when the user-pays model is implemented. Similar principle can be extended to the ad-financed model.