Value Creation in Platform Markets after Technological Change: Mechanisms beyond Network Size

Abstract

Studies on network externalities and platform markets have emphasized the key role of network size to create value. However, recently strategy scholars have started examining also other factors driving firm competitive advantage in networks industries. We join this growing debate and investigate additional mechanisms of value creation in platform markets, beyond the network size aspect. We show that the value of existing network effects is contingent on changes in the possibilities of transactions, which in turns can be caused by new technologies. Our findings illustrate that, if a new technology reduces transaction costs for newly opened channels for existing products, the value of the cross-side externalities among old markets declines. Therefore, the revenues that a platform can capture from devalued externalities also reduces. We develop and test our hypotheses by examining the impact of the Internet digitalization on the Italian newspaper industry (2005-2012). The research combines quantitative (dynamic panel estimation) and qualitative (25 interviews) data, and sheds some new light on the theoretical linkage among value creation and capture, platform performance, and technological changes.