Indirect Network Externalities Research Articles

Competition and industrial policy in the 21st century

Abstract Large fixed costs and (direct and indirect) network externalities generate barriers to entry and high markups for winners in the digital industry. The potential for high prices, low innovation and abuses of dominant position as well as the contribution to rising inequality raise the question of how countries should regulate the industry. The tech giants’ dominance does not confront us with an unpalatable choice between laissez-faire and populist interventions. The commentary explains economic stakes, considers desirable adaptations of regulation in the digital age and draws some conclusions for policy reform.

Аэропорты как платформы: следствия для антимонопольного правоприменения

Airports connect several functionally heterogeneous groups of users (passengers or cargo carriers, airlines, advertising and other service companies), enable direct interaction between them and affiliate each of them. These provide ground to analyze airports as platforms, which raises a question of how antitrust enforcement should account for characteristics of airports as platforms. The author shows that the presence of indirect network externalities and pass-through effects need to be taken into account when considering the relevant boundaries of markets with airports. The author proposes an approach to quantitatively assess indirect network externalities and pass-through effect using a survey. In addition, when defining the minimal set of products while testing relevant market boundaries the analysis of core functions can be used. This approach allows to find a minimum set of products that are distributed by airport as a platform. The characteristics of airports as platforms should also be taken into account when analyzing platform pricing, as the traditional price-cost test applied to the separate markets can be misleading.

Exploring the antecedents of trust and users’ continuance intention in hybrid online travel platforms: the role of network externalities and platform quality

ABSTRACT Drawing from network externalities perspective in the Economics literature, this study investigates the antecedents of trust and users’ continuance intention in the context of hybrid online travel platforms (HOTPs). Data were obtained by surveying 489 users of HOTPs in China. The empirical results based on the PLS-SEM model showed that indirect and direct network externalities positively influence functional quality and hedonic quality respectively. Furthermore, both functional quality and hedonic quality of HOTPs positively affect users’ trust, which in turn positively affects users’ continuance intention and negatively affects perceived risks.

Understanding people's intention to use facial recognition services: the roles of network externality and privacy cynicism

PurposeBased on the cognition–affect–conation pattern, this study explores the factors that affect the intention to use facial recognition services (FRS). The study adopts the driving factor perspective to examine how network externalities influence FRS use intention through the mediating role of satisfaction and the barrier factor perspective to analyze how perceived privacy risk affects FRS use intention through the mediating role of privacy cynicism.Design/methodology/approachThe data collected from 478 Chinese FRS users are analyzed via partial least squares-based structural equation modeling (PLS-SEM).FindingsThe study produces the following results. (1) FRS use intention is motivated directly by the positive affective factor of satisfaction and the negative affective factor of privacy cynicism. (2) Satisfaction is affected by cognitive factors related to network externalities. Perceived complementarity and perceived compatibility, two indirect network externalities, positively affect satisfaction, whereas perceived critical mass, a direct network externality, does not significantly affect satisfaction. In addition, perceived privacy risk generates privacy cynicism. (3) Resistance to change positively moderates the relationship between privacy cynicism and intention to use FRS.Originality/valueThis study extends knowledge on people's use of FRS by exploring affect- and cognitive-based factors and finding that the affect-based factors (satisfaction and privacy cynicism) play fully mediating roles in the relationship between the cognitive-based factors and use intention. This study also expands the cognitive boundaries of FRS use by exploring the functional condition between affect-based factors and use intention, that is, the moderating role of resistance to use.

Do direct and indirect network externalities matter? Unpacking the causal antecedents of perceived gratifications and user loyalty toward mobile social media

PurposeBy building and examining an integral model, the principal objectives of this research are to systematically explore how indirect and direct network externalities lead to user loyalty toward WeChat through the mediating effect of perceived gratifications.Design/methodology/approachThe data were collected through an online survey of 688 young people in Mainland China. To empirically assess the conceptual model, zero-order correlation analyses and structural equation modeling were carried out utilizing web-based data.FindingsPath analysis results demonstrate that indirect network externalities and direct network externalities exert a significant impact on users' hedonic gratifications and utilitarian gratifications. Moreover, the study discovers the significant mediating influences of utilitarian gratifications on the association between indirect network externalities and user loyalty.Research limitations/implicationsTheoretically, this article may extend the scope of diverse studies on the association between network externalities and perceived gratifications and offer fresh insights into how mobile social media could actually improve user loyalty through enhancing perceived values among younger generation. Practically, this research assists mobile social media practitioners in retaining users and gaining competitive advantages over rival applications.Originality/valueAlthough the extraordinary growth of WeChat has successfully become the dominant media by which individuals develop interpersonal network and contact with others, the roles of perceived gratifications between network externalities and user loyalty toward WeChat have not yet been investigated in depth. These obtained outcomes not only enrich the existing literature regarding the relationship between network externalities and affective response, but also offer fresh insights to mobile social media designers, marketers and users.

Welfare Effects of Socially Conscious Platforms in Two-Sided Markets

Abstract This note presents a model of platform competition in a two-sided market, with one competing platform pursuing not only its own profit but also consumer surplus. We investigate how the presence of such a socially conscious platform affects market competition. Results indicate that greater emphasis as an objective put on consumer surplus by the socially conscious platform leads to higher market share. Creation of a larger network enhances the total benefits associated with indirect network externalities in the two-sided market. When the extent of indirect network externalities is sufficiently strong, increased network benefits can improve social welfare. By contrast, if indirect network externalities are weak, then the socially conscious platform might be detrimental to society.

Platform Encroachment and Own‐Content Bias*

This paper presents a model of platform encroachment, in which a platform not only acts as an intermediary between consumers and third‐party sellers, but also sells its first‐party products. When encroaching, the platform chooses between fair and biased search engines. Under the fair search, all products are equally likely to appear in search results, whereas the first‐party product is more likely to appear under biased search. Biased encroachment makes the platform impose a lower commission on sellers, which leads to a lower equilibrium price which consequently attracts more consumers. Increased consumer participation can raise seller participation through indirect network externalities.

The interaction between direct and indirect network externalities in the early diffusion of mobile social networking

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.

Online platform quality, discount, and advertising: A theoretical analysis

The paper discusses the optimal strategies of a two-sided monopoly platform where the platform offers price discount to buyers. The platform uses advertising instruments to transmit information about discount to buyers and also provides service to its buyers. Although discount adds utility to buyers only, it affects per-interaction price of both buyers and sellers because of the presence of indirect network externality. The model analysis shows that service quality and level of advertisement will reduce unambiguously with discount for the monopoly platform. A comparison of monopoly equilibrium with the social optimum reveals that the monopoly platform sets higher service quality compared to the social planner.

Entrepreneurial dynamics in two-sided platforms: the influence of sides in the case of Friendz

PurposeTwo or multi-sided platforms - defined as those companies that aim to connect two or more groups of customers leveraging the opportunities provided by indirect network externalities – got massive attention from both scholars and practitioners over the last decade. Entrepreneurship scholars mainly focused on the platform's ability to enable entrepreneurial ventures for the complementors' side, exploring the network-centric view. This study aims to expand it by exploring the broader influence that sides can have on the platform provider's entrepreneurial decisions over time, during the evolution of the two-sided platform.Design/methodology/approachThe study is based on a longitudinal single case study developed over five years. The research presents the born and evolution of Friendz, an Italian two-sided platform.FindingsThe research presents a four-phases evolution process that shows how the entrepreneurs may first leverage an existing platform to develop a new venture and then develop his/her own two-sided platform. In this latter phase, the findings show how the sides may actually influence the platform provider's entrepreneurial decisions, both in terms of value proposition design, but also regarding the creation of new ventures.Research limitations/implicationsThe study contributes to the two-sided platform literature highlighting new evolutionary paths that expand current literature and highlight the doubling platform approach. Moreover, it contributes to the entrepreneurship literature offering a novel perspective on the entrepreneurial dynamics in two-sided platforms by re-balancing the power between the platform provider and the sides within the double network-centric view.Practical implicationsFrom a practitioners' perspective, this study offers an evolutionary path and specific tactics related to the evolution of an entrepreneurial venture based on a two-sided platforms that may inspire entrepreneurs working on two-sided platforms on how to use existing platforms and on the management of sides and the value propositions used to target them.Originality/valueThis study takes a novel perspective at the intersection between platforms and entrepreneurship literature streams, exploring the power that sides have over the platform provider in shaping the platform's entrepreneurial evolution. In doing so, it proposes a double network view on two-sided platforms and highlights three network-related tensions that can guide the evolution of the two-sided platforms.

Dynamic Optimal Pricing of Ridesharing Platforms under Network Externalities with Stochastic Demand

Ridesharing two-sided platforms link the stochastic demand side and the self-scheduling capacity supply side where there are network externalities. The main purpose of this paper is to establish the optimal pricing model of ridesharing platforms to dynamically coordinate uncertain supply and stochastic demand with network externalities in order to maximize platforms’ revenue and social welfare. We propose dynamic pricing strategies under two demand scenarios that minimize order loss in the surge demand period and maximize social welfare in the declining demand period. The numerical simulation results show that dynamic pricing strategies could stimulate the supply to reduce delayed orders in the surge demand scenario and adjust the demand to maximize social welfare under declining demand scenario. Additionally, we further find that the direct network externalities positively influence the platforms’ revenue, and the indirect network externalities have a negative effect on social welfare in the declining demand scenario, and a higher wage ratio cannot enhance the platforms’ revenue.

Optimal regulatory policies for charging of electric vehicles

Electric vehicles (EVs) and their associated charging stations are characterized by indirect network effects. In this paper we propose a theoretical model covering both the entry of charging stations and the sales of EVs. The model is used to study policies for developing an adequate charging network for existing and future EV owners. First, we find that governments should subsidize both the variable charging costs at each station and the costs of market entry for charging stations. The charging subsidy should ensure marginal cost pricing on charging, while the entry costs subsidy internalizes the indirect network externality. Second, we also find that the ongoing transition to one charging standard in Europe will unambiguously mean higher market shares for EVs and higher welfare for EV owners.

A Complementor Strategy Based on Fit With Platforms and Competition Among Products

Within platform markets, research is dominated by the platform owner’s perspective. This study takes the complementor perspective and investigates how complementors can decrease the timeframe needed to sell their products on the platform. Products could have various degrees of fit with different platforms, ranging from bad to excellent. Therefore, we introduce a new concept, namely fit between a product and platform, and develop two district measures for it: the number of subcategories and the number of details in product presentation on the platforms. Based on survival analyses and Rubin’s potential outcomes framework, we observe a negative relationship of fit with the timeframe needed to sell a product. More specific, complementors will be able to sell 10% faster when aligning their products to the more appropriate platforms. Another element that is researched in this study is the competition among products. We identify an inverted U-shaped relationship, signaling that the benefits of indirect network externalities only hold up to a certain extent for complementors, after which the disadvantages of crowdedness dominate. This contradicts current literature from the platform owner’s perspective, which mentions that the benefits of indirect network externalities take place without boundaries.

Examining Protection Motivation and Network Externality Perspective Regarding the Continued Intention to Use M-Health Apps.

M-health apps have developed rapidly and are widely accepted, but users’ continued intention to use m-health apps has not been fully explored. This study was designed to obtain a better understanding of users’ continued intention to use m-health apps. We developed a theoretical model by incorporating the protection motivation theory and network externalities and conducted an empirical study of a 368-respondent sample. The results showed that: (1) perceived vulnerability has a direct impact on users’ self-efficacy and response efficacy; (2) self-efficacy and response efficacy have a direct impact on users’ attitudes and continued intention; (3) network externalities affect users’ attitudes and continued intention, among which direct network externalities have an indirect impact on users’ continued intention through attitude; and (4) the impacts of self-efficacy, response efficacy, and indirect network externalities on continued intention are partially meditated by attitudes.

Estimating Platform Market Power in Two-Sided Markets with an Application to Magazine Advertising

In two-sided markets, two groups of agents interact through platforms. Because agents’ decision to join a platform is affected by the presence of agents on the other side, their interactions create indirect network externalities and make platforms’ strategies different from those of firms in one-sided markets. In this paper, I use a structural model to show that platforms may take a loss on one side of the market to make a profit on the other side and that platform mergers may benefit some agents by lowering prices or attracting more agents on the other side of the market. (JEL D62, G34, L82, M37)

New Developments in Equity Crowdfunding: A Review

This article reviews the role and nature of equity crowdfunding (ECF) as a novel source of entrepreneurial finance for unlisted startups and ventures. It is distinctive from extant reviews in several respects. First, it views ECF as part of the fintech revolution and, more specifically, as a multisided marketplace that offers indirect network externalities to its participating groups such as the crowd and, increasingly, traditional entrepreneurial finance providers like angels and VC investors. Second, it stresses the relevance of corporate finance concepts by drawing parallels between initial ECF campaigns and IPOs. Finally, it focuses on the world’s most evolved ECF ecosystem – that in the UK – to highlight several new developments in ECF like the rise of the lead investor or coinvestment funding models and the role of light touch regulation.

Platform Encroachment and Own-Content Bias

This paper presents a model of platform encroachment, in which a platform not only acts as an intermediary between consumers and third-party sellers, but also sells its first-party products. When encroaching, the platform chooses between fair and biased search engines. Under the fair search, all products are equally likely to appear in search results, whereas the first-party product is more likely to appear under biased search. Biased encroachment makes the platform impose a lower commission on sellers, which leads to a lower equilibrium price which consequently attracts more consumers. Increased consumer participation can raise seller participation through indirect network externalities.

An extended Bass Model on consumer quantity of B2C commerce platforms

For B2C (Business to Customer) commerce platforms, quickly attracting enough consumers is an extremely important issue. However, existing studies mainly analyze whether consumers make online purchase and its influencing factors, but pay less attention to the changes in consumer size. Therefore, this paper aims to study the changing law of consumer quantity from the macro level, which may help E-commerce platforms reasonably predict it. Firstly, we point out the unique feature of the B2C commerce platforms compared with traditional products or technologies, namely indirect network externality. And we combine this feature and the factors that influence consumers and enterprises’ adoption of B2C commerce to build an extended Bass Model. Finally, we verify the validity of our model with the data of Chinese online shoppers. In addition, we put forward some suggestions on the future research of this extended Bass Model.

An old friend is better than two new ones? <i>Approaches to market research in the context of digital transformation for the antitrust laws enforcement</i>

Digital transformation has led to changes in business models of traditional players in the existing markets. What is more, new entrants and new markets appeared, in particular platforms and multisided markets. The emergence and rapid development of platforms are caused primarily by the existence of so called indirect network externalities. Regarding to this, a question arises of whether the existing instruments of competition law enforcement and market analysis are still relevant when analyzing markets with digital platforms? This paper aims at discussing advantages and disadvantages of using various tools to define markets with platforms. In particular, we define the features of the SSNIP test when being applyed to markets with platforms. Furthermore, we analyze adjustment in tests for platform market definition in terms of possible type I and type II errors. All in all, it turns out that to reduce the likelihood of type I and type II errors while applying market definition technique to markets with platforms one should consider the type of platform analyzed: transaction platforms without pass-through and non-transaction matching platforms should be tackled as players in a multisided market, whereas non-transaction platforms should be analyzed as players in several interrelated markets. However, if the platform is allowed to adjust prices, there emerges additional challenge that the regulator and companies may manipulate the results of SSNIP test by applying different models of competition.

Exclusionary pricing in two-sided markets

This paper studies the incentives to engage in exclusionary pricing in the context of two-sided markets. Platforms are horizontally differentiated, and seek to attract users of two groups who single-home and enjoy indirect network externalities from the size of the opposite user group active on the same platform. The entrant incurs a fixed cost of entry, and the incumbent can commit to its prices before the entry decision is taken. The incumbent has thus the option to either accommodate entry, or to exclude entry and enjoy monopolistic profits, albeit under the constraint that its price must be low enough to not leave any room for an entrant to cover its fixed cost of entry. We find that, in the spirit of the literature on limit pricing, under certain circumstances even platforms find it profitable to exclude entrants if the fixed entry cost lies above a certain threshold. By studying the properties of the threshold, we show that the stronger the network externality, the lower the thresholds for which incumbent platforms find it profitable to exclude. We also find that entry deterrence is more likely to harm consumers the weaker are network externalities, and the more differentiated are the two platforms.