Digital Platforms and Network Effects
I took “Analyzing Digital Platforms” with Professor Michael Maffie, and to my surprise network effects was a huge topic of discussion and revealed to be the foundation of several digital platforms we analyzed.
I learned that a platform is a business model that facilitates the exchange of value between two or more user groups, a consumer and a producer. In order to make these exchanges happen, platforms harness and create large, scalable networks of users and resources that can be accessed on demand. Platforms create communities and markets with network effects that allow users to interact and transact. Johnson and Moazed explain how network effects occur when the value of the platform increases with the number of users. As more users join the platform, there’s a positive feedback loop that attracts even more users. This drives rapid growth, enhances the platform’s value, and leverages economies of scale. (Johnson and Moazed) Networks are the new aggregator of business value, when the world becomes more connected what a company owns matters less than the resources it can connect to. Today’s most valuable businesses are those that can build and orchestrate large networks, not those that can aggregate and centralize large amounts of resources under one roof. Platforms are often defined by the network that surrounds it, without its consumers and producers, platforms wouldn’t exist. Many digital platforms, especially social networks and communication platforms, benefit from network effects. Network effects occur when the value of the platform increases with the number of users. As more users join the platform, there’s a positive feedback loop that attracts even more users. This drives rapid growth, enhances the platform’s value, and leverages economies of scale. Platform companies like Amazon, Google, Facebook, and Apple have achieved a level of economic scale and market dominance that allows them to shape and control the way consumers and other businesses interact with their platforms. In contrast to traditional business models based on selling goods or services, platform companies represent a new means to create and capture value through their capacity to harness an immense amount of data in ways that allow them to rule the market . Platform business models enable companies to expand at a pace unprecedented in human history, in other words, platforms grow exponentially rather than linearly. Platform businesses are more cost effective and higher scale than old models. Four functions of a platform: audience building, matchmaking, providing core tools and services, setting rules and standards. Amazon connect buyers with sellers, and information platforms like Facebook and Google connect people to each other, to advertisers, and to information. Lehondrivta also mentions that it is the concept of economy of scale in which the unit cost of doing something goes down as the quantity goes up. Amazon enjoys economies of scale over regular brick and mortar stores. Platforms like Amazon and Google are so ingrained within our society that politicians are scared to regulate them; Culpepper and Thelen highlight that these companies have truly become so integral to people’s daily lives. For example everyone uses Amazon’s fast delivery service (Amazon Prime) and Facebook’s role as an information gateway connect consumers to essential services and information. Politicians are wary of being seen as the ones who might disrupt these convenient and popular services. Bezos said that he would step down if there was a new platform to replace amazon and eventually he did, he is now focusing on a space technology company that he founded.
Moazed, A., & Johnson, N. L. (2016). Modern monopolies what it takes to dominate the 21st-century economy. MarmotLibraryNetwork. https://gcld.marmot.org/Record/.b57228280