Geographic Rent, Network Externalities and Internet Platform Economy

Abstract

There are two significant economic phenomena in the last decade in China. One is the development of real estate; the other is the economy driven by the internet. The data sourced from National Bureau Statistics and China’s Academy of Electronic Commerce shows that the private investment on real estate in China grows fast at the average annual growth rate （AAGR） of 42.8% during the period of 2006—2016, resulting in the price of house experiencing an increase with the AAGR of 13% during the same period. The data also suggests that the average rate increase in the internet platform economy is calculated to be 28.6% per year during the last decade, while in this period the AAGR of GDP keeps 13% approximately. The economic development is a big system. On the one hand, the continuous rise of house price inevitably drives an increase in the geographic rent and then firms’ cost. On the other hand, the fast growth of the geographic rent caused by the fast increase of house price is likely to crowd out consumption. If two important actors （i.e. e-firms and e-consumers） in the two-side market are negatively affected by the continuous rise of the geographic rent, it can be inferred that the economy enhanced by the internet platform, e-firms and e-consumers will be also negatively affected and even trapped into trouble. However, China’s evidence indicates that the economy based on the internet platform experiences a fast growth in the context of the high rent of off-line shops. Two questions are raised: whether the geographic rent promotes the economic development based on the internet platform, and how does the geographic rent impact on the platform economy? It is necessary to understand the nature of the platform economy as responding to these questions. The platform economy can not only cross geography bounds but also cross sector bounds, leading to a new business model including new products, new services and new experiences. In this case, the region with a high off-line geographic rent is likely to drive firms and consumers to take part in the e-business platform, resulting in a fast increase of on-line economic development. In addition, the geographic rent may drive e-firms to innovate. The innovation effect is important for e-business development. In this cast, China’s platform economy is fast developed in the context of a high geographic rent during the last decade. Based on the two-sided market theory, this paper establishes an empirical model to explore how the cost of the geography rent impacts on the internet platform economy, using China’s provincial panel data from the period of 2009—2016, where we distinguish the trade expansion effect, the trade substitution effect, and the platform innovation effect. The results show that the effects of trade expansion and trade substitution are both positive and significant, while the platform innovation effect turns out to be not significant. In other words, as facing the context characterized by a high level of geographic rent cost, not only firms can use the internet platform to expand the trade market but also consumers can enter into the internet platform to get more options of goods, leading to the fast development of e-business by network externalities. However, our empirical result also shows that the internet platform economy driven by the off-line geographic rent is difficult to produce the innovation effect. Our exploration tries to produce a new framework to explain why the internet platform economy increasingly grows in China.