Positive Network Effects Research Articles

Zero Pricing Platform Competition

This article studies competition between different types of ad-funded platforms attracting consumers with free services. Consumers often find advertisements a nuisance on such platforms. We study how under a competitive setting platforms balance the tension between attracting consumers and rent extraction from the advertising side. We propose a flexible yet simple model that studies competition between standard platforms and social media platforms (with same-side network effects). We find that an increase in either positive same-side network effects or an increase in consumer disutility from advertisements leads to a reduction in the number of ads on that platform. When competing platforms merge, consumer side network effects do not impact prices and the number of ads is higher. In a setting where consumers present a negative (congestion) externality on each other, competition fails to protect consumer welfare and behaves erratically. Finally, we present a few extensions and discuss some policy implications.

The Postcapitalist Transition: Policy Implications for the Left

AbstractThe postcapitalism thesis asserts that open source and collaborative non‐profit organisations represent a new, non‐market sector in which the profit motive and monetary exchange no longer drive economic activity; in Marxist political economy terms, they are a new means for suppressing the law of value. Information technology has produced four systemic dysfunctions, limiting capitalism’s ability to function as a complex adaptive system: the zero marginal cost effect, the tendency to delink work from wages, positive network effects, and information asymmetries. In response, in addition to the traditional remedies of social democracy for a stagnant neoliberal economic model, left parties must adopt a programme of transition: aggressively breaking up technological monopolies; promoting universal basic income and basic service solutions; outlawing rent‐seeking business models; and promoting data democracy.

Controlling and enabling practices to manage supply in online service triads

PurposeThe purpose of this paper is to understand which controlling and enabling practices are used, how the numerous supplying partners are managed and how positive network effects are generated in online service triads (multi-sided platform – supplying partners – consumers).Design/methodology/approachA single representative in-depth case study was conducted to refine theory on managing service triads. The main data source consists of field notes collected by one author, who held a temporary position within the organization. Additional data were collected from observations, internal documents, informal talks and 20 interviews.FindingsThe authors found controlling and enabling organizational practices in four main categories on two levels as follows: managing network composition (system level), managing order fulfillment and returns (operations level), category management (both levels) and capability enhancement (both levels).Research limitations/implicationsThe authors show that both controlling and enabling practices are present in online service triads. This enables platform owners and supplying partners to share responsibilities for creating positive network effects, i.e. to increase scale, which increases value, which again attracts more suppliers and consumers, which creates more value, etc.Practical implicationsThe authors present a range of and controlling and enabling practices that describe how multi-sided platforms can manage numerous supplying partners in an online context.Originality/valueThis study is the first to show that contractual and relational governance is insufficient in service triads in online settings with numerous supplying partners. Further, the authors provide empirical evidence that supply networks continuously adapt over time.

Cognitive Enhancement and Network Effects: how Individual Prosperity Depends on Group Traits

A central debate in bioethics is whether parents should try to influence the genetic basis of their children’s traits. We argue that the case for using mate selection, embryo selection, and other interventions to enhance heritable traits like intelligence is strengthened by the fact that they seem to have positive network effects. These network effects include increased cooperation in collective action problems, which contributes to social trust and prosperity. We begin with an overview of evidence for these claims, and then argue that if individual welfare is largely a function of group traits, parents should try to preserve or enhance cognitive traits that have positive network effects.

Strategic Challenges for Platform-based Intelligent Assistants

Abstract Artificial Intelligence-based Assistants AIAs are spreading quickly both in homes and offices. They already have left their original habitats of speakers providing easy access to music collections. The initiated a multitude of new devices and are already populating devices such as TV sets. Characteristic for the intelligent digital assistants is the formation of platforms around their core functionality. Thus, AIS capabilities of the assistants are used to offer new services and create new interfaces for business processes. There are positive network effects between the assistants and the services as well as within the services. Therefore, many companies see the need to get involved in the field of digital assistants but lack a framework to align their initiatives with their corporate strategies. In order to lay the foundation for a comprehensive method, we are therefore investigating intelligent digital assistants. Based on this analysis, we are developing a framework of strategic opportunities and challenges.

Platform coopetition in two-sided markets

This paper explores the welfare effects of coopetition between two-sided platforms in the context of a competitive bottleneck, i.e., when participants on one side of the market (the buyers) choose at most one platform (i.e., singlehome), while participants on the other side (the sellers) can be active on both platforms (i.e., multihome). Under coopetition, when platforms set their sellers’ subscription prices cooperatively and buyers’ subscription prices non-cooperatively, platforms internalize that when they reduce their price on the seller side, this will harm the rival platform by making it less attractive to buyers, and through the indirect network effects, to sellers too. Therefore, coopetition leads the platforms to raise their subscription price for sellers compared to the case of full competition. However, as sellers become more valuable under coopetition and buyers exert a positive cross-group network effect on sellers, the competition for buyers is intensified, which leads to a lower price for buyers under coopetition than under competition. Coopetition can increase total surplus compared to full competition if additional participants on the singlehoming side join the market.JEL classification: D43, L13, L86.

Multi-sided platform diffusion in competitive B2B networks: inhibiting factors and their impact on network effects

Although multi-sided platforms (MSPs) and their diffusion in B2C contexts received heightened attention in recent literature, there is still a dearth of research on MSP diffusion inhibitors in competitive B2B networks. Using the air cargo hub in Frankfurt, Germany, as highly competitive B2B network which struggles with the acceptance of an MSP for over 10 years, we applied a grounded theory approach to identify key inhibitors to MSP diffusion. Based on several interviews with a diverse set of stakeholders and a systematic coding procedure, we identified 21 factors inhibiting MSP diffusion. The majority of these factors slows down or even thwarts positive network effects, typically occurring on MSPs. Furthermore, we derive a classification showing that the inhibiting factors primarily hamper cross-side network effects in highly competitive B2B networks, and to a lesser degree also same-side and mixed-side network effects. Finally, implications of these results and future research directions are discussed.

Impacts of EU funded R&D networks on the generation of key enabling technologies: Empirical evidence from a regional perspective

AbstractCross‐regional R&D networks are essential for regional innovativeness. Yet, we lack insights into technology field‐specific effects of a region's network connectivity. This study investigates key enabling technologies (KETs) to compare knowledge creation effects of EU funded R&D networks for different technological fields. By applying spatially filtered regression models together with marginal effect interpretations for non‐linear models we quantify and compare network effects across KET fields. Results show that the generally positive network effects differ depending on region‐internal endowments and the nature of the underlying technologies. Policy implications arise for the interrelations between EU research, industrial and regional policy.

Ownership Network and Firm Growth: What Do Five Million Companies Tell About Chinese Economy

The finance–growth nexus has been a central question in understanding the unprecedented success of the Chinese economy. Using unique data on all the registered firms in China, we build extensive firm-to-firm equity ownership networks. Entering a network and increasing network centrality leads to higher firm growth, and the effect of global centralities strengthens over time. The RMB 4 trillion stimulus launched by the Chinese government in 2008 partially “crowded out” the positive network effects. Equity ownership networks and bank credit tend to act as substitutes for state-owned enterprises, but as complements for private firms in promoting growth.

Oligopoly with network effects: firm-specific versus single network

We consider symmetric oligopolies with positive network effects where each firm has its own proprietary network, which is incompatible with that of its rivals. We provide minimal conditions for the existence of (non-trivial) symmetric equilibrium in a general setting. We analyze the viability of industries with firm-specific networks and show that the prospects for successful launch decrease with more firms in the market. This is a major reversal from the case of single-network industries. A central part of the paper compares the viability and market performance of industries with compatible and incompatible networks and shows that viability, output, (endogenous) demand, and social welfare are higher for the former. However, the comparison of industry price, profit and consumer surplus requires respective qualifications, of a general nature for the former two but not for the latter. Overall, these results provide theoretical grounding in a general but not universal sense for the conventional view that compatibility leads to superior performance, which was hitherto based on case studies and stylized facts.

International Migration and Export Flows: Evidence from the People's Republic of China

Since China’s opening to international trade, the rapid growth of the country’s export sector has been coupled by an intensification of migratory outflows of ethnic Chinese. The literature has already stressed the beneficial role of migration in enhancing bilateral trade. The present paper applies a gravity model in order to capture the impact of migration on Chinese exports for a relatively long period of time (1995-2017) where significant developments take place. We estimated four regressions, each of them confirming the positive network effects of migration for boosting export growth. Apart from the main finding, it appears that the role of institutional and geographical proximity can prove to be complementary for trade enhancement. The results finally suggest mixed effects due to the countries’ import openness, indicating that China’s free trade agreements acts as a substitute for smoothing trade competition from third countries.

International Migration and Export Flows: Evidence from the People’s Republic of China

Since China’s opening to international trade, the rapid growth of the country’s export sector has been coupled by an intensification of migratory outflows of ethnic Chinese. The literature has already stressed the beneficial role of migration in enhancing bilateral trade. The present paper applies a gravity model in order to capture the impact of migration on Chinese exports for a relatively long period of time (1995-2017) where significant developments take place. We estimated four regressions, each of them confirming the positive network effects of migration for boosting export growth. Apart from the main finding, it appears that the role of institutional and geographical proximity can prove to be complementary for trade enhancement. The results finally suggest mixed effects due to the countries’ import openness, indicating that China’s free trade agreements acts as a substitute for smoothing trade competition from third countries.

Sales Force Compensation Design for Two-Sided Market Platforms

The authors study the use of sales agents for network mobilization in a two-sided market platform that connects buyers and sellers, and they examine how the presence of direct and indirect network effects influences the design of the sales compensation plan. They employ a principal–agent model in which the firm tasks sales agents to mobilize the side of the platform that it monetizes (i.e., sellers). Specifically, the presence of network effects alters the agency relationship between the firm and the sales agent, requiring the platform firm to alter the compensation design, and the nature of the alteration depends on whether the network effects are direct or indirect and positive or negative. The authors first show how the agent’s compensation plan should account for different types of network effects. They then establish that when the platform firm compensates the agent solely on the basis of network mobilization on the side cultivated by the agent (sellers), as intuition would suggest, it will not fully capitalize on the advantage of positive network effects; that is, profit can be lower under stronger network effects. To overcome this limitation, the platform should link the agent’s pay to a second metric, specifically, network mobilization on the buyer side, even though the agent is not assigned to that side. This design induces a positive relation between the strength of network effects and profit. This research underlines the complexity and richness of network effects and provides managers with new insights regarding the design of sales agents’ compensation plans for platforms.

Network Effects, Bargaining Power, and Product Review Bias: Theory and Evidence

I construct a theoretical framework for expert product reviews and demonstrate how the existence of positive network effects can make review inflation profitable even when consumers are rational. This finding moreover suggests that product reviews may serve as a coordination mechanism for early adopters. In an empirical application to the video game journalism industry, I find evidence that reviews are inflated for games produced by large firms and for those that are part of pre‐existing game franchises. Additionally, I find variation in inflation across genres that would be inconsistent with common alternative theories of inflation, such as consumer naivete.

On the Profitability of Bundling Sale Strategy for Online Service Markets With Network Effects

In recent years, we have witnessed a growing trend for online service companies to offer “bundling sales” to increase revenue. Bundling sale means that a company groups a set of products/services and charges this bundle at a fixed price, which is usually less than the total price of individual items in the bundle. In this work, our aim is to understand the underlying dynamics of bundling, particularly what is the optimal bundling sale strategy and under what situations it will be more attractive than the separate sales. We focus on online service markets that exhibit network effects . We formulate mathematical models to capture the interactions between buyers and sellers, analyze the market equilibrium and its stability, and provide an optimization framework to determine the optimal sale strategy for a service provider. We analyze the impact of various factors on the profitability of bundling, including the network effects, operating costs, and variance and correlation of customers’ valuations toward these services. We show that bundling is more profitable when the variance of customers’ valuations and the operational cost of the services are small. In addition, a positive network effect and a negative correlation among customers’ valuation on services increase the profitability of bundling, whereas the heterogeneity of services and the asymmetry of operating costs reduce its advantage.

Understanding the Social Learning Effect in Contagious Switching Behavior

We study the contagious switching behavior related to a consumer’s choice of wireless carriers, that is, that a consumer is more likely to switch wireless carriers if more of their contacts from the same carrier have switched. Contagious switching (or a positive network effect) can be driven by information-based social learning, as well as other mechanisms related to network size. Although previous marketing literature has documented the social-learning effect, most of the applications studied involve products in which consumers usually do not enjoy any direct benefits from a large network other than from information-based social learning. We explore the importance of the social-learning effect relative to other mechanisms that may also lead to the network effect. We propose a dynamic structural model with interpersonal interactions. To model the social-learning effect, a consumer uses feedback from his or her contacts who have switched from a focal carrier to update his or her quality expectations of alternative carriers. Our model further accounts for two unique aspects of consumer strategic learning: (i) the individual’s perception on the signal of alternative carriers from contacts who switch is systematically different according to whether the signal comes from a loyal contact; and (ii) that the perceived noisiness of the signal on alternative carriers from a contact who has switched depends on the strength of the relationship between the individual and the contact. The remaining network effect not captured through social learning is modeled as a function of the size of the network. We solve the model with a two-step dynamic programming algorithm, with the assumption that a consumer is forward-looking and decides whether to stay with the same service carrier in each period by maximizing the total utility received from that day onward. We apply the proposed model to the data set of a mobile network operator in a European country. We find that churning/switching behavior is contagious in the network context and that one-third of general network effects can be attributed to social learning. We also detect strategic learning by consumers from their contacts in two ways: the experience signal on alternative carriers from a more loyal contact who has switched from the focal carrier is perceived to be more positive than that from a less loyal contact; and the social-learning effect is stronger from an individual’s closest contacts. The simulation analysis demonstrates the value of our model in helping a company prioritize its customer relationship management effort. This paper was accepted by Matthew Shum, marketing.

FREE VERSUS SECOND‐BEST ENTRY IN COURNOT OLIGOPOLIES WITH FIRM‐SPECIFIC NETWORKS

ABSTRACTThis paper endogenizes the number of firms in an industry with positive network effects, complete incompatibility, and firms that compete in quantity. To this end, we compare two possibilities: free entry and second‐best number of firms (the one that maximizes social welfare). We show that with business‐stealing competition, free entry yields, in general, more firms than the socially optimal solution. In addition, we find that by the nature of the industry with firm‐specific networks, total production may be greater or lower under free entry than with a regulator; moreover, some industries attain their maximum social welfare with a monopoly.

A pricing model for group buying based on network effects.

Group buying (GB) is a popular business model in e-commerce. With the rise of online social media, the positive network effect of buying with others is more important than price discount for consumers to choose GB. However, the negative network effect of GB is also significant for some consumers. In this paper, we classify consumers into two segments considering both positive and negative network effects, and three possible sales strategies as well as their optimal decisions on price are presented. We find that GB strategy dominates individual buying (IB) strategy when the positive network effect is sufficiently high or the proportion of consumers with low valuation is relatively large. We also find that MIX strategy offering both IB and GB is always better than IB, while the relationship between MIX and GB is depending on actual market situations. Some other managerial insights are also discussed.

The Network Effects of International Financial Regulation

This paper examines the question of global coordination among financial regulators through the lens of network effects. It introduces and surveys three unique kinds of network effects which can be created by the adoption of a global financial regulatory standard: (a) network effects in the financial markets; (b) network effects among the regulated firms; and (c) network effects among the financial regulators themselves. This paper offers a model which shows that positive network effects can generate a spiral ratchet effect that will induce countries to sequentially adopt global financial regulatory standards.

Tail event driven networks of SIFIs

The interdependence, dynamics and riskiness of financial institutions are the key features frequently tackled in financial econometrics. We propose a Tail Event driven Network Quantile Regression (TENQR) model which addresses these three aspects. More precisely, our framework captures the risk propagation and dynamics in terms of a panel quantile autoregression involving network effects that are quantified through a time-varying adjacency matrix. To reflect the risk content in stress situations the construction of the adjacency matrix is suggested to include tail events. More precisely we employ the conditional expected shortfall as risk profile. Based on the similarity of the risk profiles we create a positive and a negative network factor, which capture the effects of risk contagion and risk diversification respectively. The developed joint spacings variance ratio test supports the suggested methodology. The TENQR technique is evaluated using the SIFIs (systemically important financial institutions) identified by the Financial Stability Board (FSB). The risk decomposition of the resulting network identifies the systemic importance of SIFIs and thus provides measures for the required level of additional loss absorbency. It is discovered that the positive network effect, as a function of the tail probability level, becomes more profound in stress situations and varies in its impact to SIFIs located in different geographic regions.