Network Effects and The Strategy Question at the Center of Lyft’s IPO
https://hbr.org/2019/03/the-strategy-question-at-the-center-of-lyfts-ipo
This article discusses the filing of Lyft’s IPO and the newly developed competitive strategy that it will have to undertake to continue its growth, especially with major competitors such as Uber. This article also highlights how network effects among the drivers and passengers of Lyft are the most important to the company’s success. Lyft defines their network effects as the more users added, the better the product or service gets, as their business model has an emphasis on growth. Lyft also noted that network effects occurs when the addition of a new user increases the value of the offering for other users. Additionally, Lyft noted in their filing that if they are not able to continue developing their network effects, then their business could be adversely affected.
This relates to our class discussion on networks effects as we defined it as for some kinds of decisions, you incur an explicit benefit when you align your behavior with the behavior of others. Additionally, a system such as a ride-sharing market can be more useful if many other people are using it. Both the supply (number of drivers) and demand (number of passengers) will benefit from an increase from both sides of the market. A market with more users will tend to have a larger amount of drivers, spread more geographically so there is more access in larger and smaller cities, and better software for mobile users. Overall, the more demand for Lyft, the better the company and service it provides will get, which will in-turn get more people to use the service, and so on.
Furthermore, this relates to another class discussion on the power-laws and the “rich-gets-richer” model as network effects provide the basis to generate power-laws as power-laws arise from the feedback introduced by correlated decisions across a population. From observable consequences of decision-making, we observed that people have a tendency to copy the decisions of people who act before them. This relates to the rich-gets-richer model because Lyft’s business model supports the preferential attachment that links are formed to pages that already have high popularity. Also, the copying model explains the more well-known something is, the more likely you are to hear their name come up and you are more likely to end up knowing about it. The same goes for Lyft. Their growth factor relies on word-of-mouth just as much as it relies on its own business function. To conclude, the power-laws models explain a crucial aspect for Lyft’s success in the industry as it has to compete with other companies with similar business models such as Uber.