Overview of the ‘Platform’ System
Platforms play the “game of power” by leveraging network effects. Power can be created through a virtuous cycle in which increased numbers of platform users continuously increase user experience and disproportional user dependency on the platform 1. As long as a platform can dominate a vertical field, the network effects will ultimately pay off by reducing the marginal cost for user acquisition and user retention to zero, and increasing switching cost on the user side to infinity. We often call this phenomenon “winner take all” 2. As a result, platforms subsidize the users or the third-party sellers (complementors) until the asymmetric dependency is established.
Single-sided network effect (or same-side network effect) occurs when a focal user can interact with a greater number of others joining the same network and using the same platform. Telephone, internet, and online social networks (almost any technology) are all this kind. As Metcalfe’s law states, the possible interconnections within the network are proportional to the square of the total number of connected users 3. After widespread adoption, users will consider the platform as an indispensable commodity. The platform enjoys significant economy of scale.
Multi-sided network effect (or cross-side network effect) occurs when a focal user can derive greater value when a greater number of complementors joining the platform 4. At the system level, Multi-sided network effects reduce the total transaction costs in the multi-sides markets by reorganizing the functional components within a traditional value chain. 5 By reconstructing social and economic networks, platforms can deconstruct a value chain into separate parts, attract participants (and pool resources) from each part, and utilize multi-sided network effect to leverage the scale and asymmetric dependencies over individual users/complementors.
Casciaro, Tiziana, and Mikolaj Jan Piskorski. “Power imbalance, mutual dependence, and constraint absorption: A closer look at resource dependence theory.” Administrative science quarterly 50.2 (2005): 167-199.↩
Eisenmann, Thomas, Geoffrey Parker, and Marshall W. Van Alstyne. “Strategies for two-sided markets.” Harvard business review 84.10 (2006): 92.↩
Metcalfe, Bob. “Metcalfe’s law after 40 years of ethernet.” Computer 46.12 (2013): 26-31.↩
Parker, Geoffrey G., and Marshall W. Van Alstyne. “Two-sided network effects: A theory of information product design.” Management science 51.10 (2005): 1494-1504.↩
Rochet, Jean‐Charles, and Jean Tirole. “Two‐sided markets: a progress report.” The RAND journal of economics 37.3 (2006): 645-667.↩