Quantifying Cross and Direct Network Effects in Online Consumer-to-Consumer Platforms

Abstract

Consumer-to-consumer (C2C) platforms have become a major engine of growth in Internet commerce. This is especially true in countries such as China, which are experiencing a big rush toward e-commerce. The emergence of such platforms gives researchers the unique opportunity to investigate the evolution of such platforms by focusing on the growth of both buyers and sellers. In this research, we build a utility-based model to quantify both cross and direct network effects on Alibaba Group’s Taobao.com, the world’s largest online C2C platform (based in China). Specifically, we investigate the relative contributions of different factors that affect the growth of buyers and sellers on the platform. Our results suggest that the direct network effects do not play a big role in the platform’s growth (we detect a small positive direct network effect on buyer growth and no direct network effect on seller growth). More importantly, we find a significant, large and positive cross-network effect on both sides of the platform. In other words, the installed base of either side of the platform has propelled the growth of the other side (and thus the overall growth). Interestingly, this cross-network effect is asymmetric with the installed base of sellers having a much larger effect on the growth of buyers than vice versa. The growth in the number of buyers is driven primarily by the seller’s installed base and product variety with increasing importance of product variety. The growth in the number of sellers is driven by buyer’s installed base, buyer quality, and product price with increasing importance of buyer quality. We also investigate the nature of these cross-network effects over time. We find that the cross-network effect of sellers on buyers increases and then decreases to reach a stable level. By contrast, the cross-network effect of buyers on sellers is relatively stable. We discuss the policy implications of these findings for C2C platforms in general and Taobao in particular. Data, as supplemental material, are available at https://doi.org/10.1287/mksc.2016.0976 .