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"Network effect"
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Quantifying Cross and Direct Network Effects in Online Consumer-to-Consumer Platforms
Consumer-to-consumer (C2C) platforms have become a major engine of growth in Internet commerce. This is especially true in countries such as China, which are experiencing a big rush toward e-commerce. The emergence of such platforms gives researchers the unique opportunity to investigate the evolution of such platforms by focusing on the growth of both buyers and sellers. In this research, we build a utility-based model to quantify both cross and direct network effects on Alibaba Group’s Taobao.com, the world’s largest online C2C platform (based in China). Specifically, we investigate the relative contributions of different factors that affect the growth of buyers and sellers on the platform. Our results suggest that the direct network effects do not play a big role in the platform’s growth (we detect a small positive direct network effect on buyer growth and no direct network effect on seller growth). More importantly, we find a significant, large and positive cross-network effect on both sides of the platform. In other words, the installed base of either side of the platform has propelled the growth of the other side (and thus the overall growth). Interestingly, this cross-network effect is asymmetric with the installed base of sellers having a much larger effect on the growth of buyers than vice versa. The growth in the number of buyers is driven primarily by the seller’s installed base and product variety with increasing importance of product variety. The growth in the number of sellers is driven by buyer’s installed base, buyer quality, and product price with increasing importance of buyer quality. We also investigate the nature of these cross-network effects over time. We find that the cross-network effect of sellers on buyers increases and then decreases to reach a stable level. By contrast, the cross-network effect of buyers on sellers is relatively stable. We discuss the policy implications of these findings for C2C platforms in general and Taobao in particular.
Data, as supplemental material, are available at
https://doi.org/10.1287/mksc.2016.0976
.
Journal Article
Optimal Software Free Trial Strategy: The Impact of Network Externalities and Consumer Uncertainty
Many software firms offer a fully functional version of their products free of charge, for a limited trial period, to ease consumers' uncertainty about the functionalities of their products and to help the diffusion of their new software. This paper examines the trade-off between the effects of reduced uncertainty and demand cannibalization, uncovers the condition under which software firms should introduce the time-locked free trial software, and finds the optimal free trial time. As software firms have the option of providing free trial software with full functionalities but a limited trial time or limited functionalities for an unlimited trial time, we develop a unified framework to provide useful guidelines for deciding which free trial strategy is preferred in the presence of network externalities and consumer uncertainty.
Journal Article
The flight of a butterfly or the path of a bullet? : using technology to transform teaching and learning
Larry Cuban returns with fresh energy and insight to one of his perennial topics: the uses and effects of digital technologies in K-12 classrooms. Cuban has an extensive track record as a skeptic about the educational consequences of those technologies. In this book, he returns to this topic by exploring the uses of these technologies in notably ambitious classrooms, all of them in schools in the heart of Silicon Valley. The book looks carefully at 41 classrooms in all, located in twelve schools in six different districts. All have devoted special attention and resources to integrating digital technologies in their education practices. Cuban observed all of these classrooms and interviewed all of the teachers in an effort to answer several straightforward, if also elusive, questions: has technology integration been fully implemented and put into practice in these classrooms? And has this integration and implementation resulted in altered teaching practices? Ultimately, Cuban asks if the use of digital technologies has resulted in transformed teaching and learning in these classrooms. The answers to these questions reflect both Cuban's nuanced understanding not only of digital technologies and their uses, but of the complex interrelations of policy and practice, and of the many, often unintended, consequences of reforms and initiatives in the education world. Similarly, his answers reflect his subtle understanding of change and continuity in education practice, and of the varying ways in which different actors in the education world--policy makers, school leaders, teachers, and others--understand, and sometimes misinterpret, those changes. -- Provided by publisher.
BOOK
Competing by Restricting Choice: The Case of Matching Platforms
We show that a two-sided matching platform can successfully compete by limiting the number of choices it offers to its customers, while charging higher prices than platforms with unrestricted choice. We develop a stylized model of online dating where agents with different outside options match based on how much they like each other. Starting from these microfoundations, we derive the strength and direction of indirect network effects and show that increasing the number of potential matches has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents resolve the trade-off between these competing effects differently, depending on their outside options. For agents with high outside options, the choice effect is stronger than the competition effect, leading them to prefer an unrestricted-choice platform. The opposite is the case for agents with low outside options, who then have higher willingness to pay for a platform restricting choice, as it also restricts the choice set of their potential matches. Moreover, since only agents with low outside options self-select into the restricted choice platform, the competition effect is mitigated further. This allows multiple platforms offering different number of choices to coexist without the market tipping.
This paper was accepted by Bruno Cassiman, business strategy.
Journal Article
Entry into platform-based markets
This paper examines the relative importance of platform quality, indirect network effects, and consumer expectations on the success of entrants in platform-based markets. We develop a theoretical model and find that an entrant's success depends on the strength of indirect network effects and on the consumers' discount factor for future applications. We then illustrate the model's applicability by examining Xbox's entry into the video game industry. We find that Xbox had a small quality advantage over the incumbent, PlayStation 2, and the strength of indirect network effects and the consumers' discount factor, while statistically significant, fall in the region where PlayStation 2' s position is unsustainable.
Journal Article
Multihoming in Two-Sided Markets: An Empirical Inquiry in the Video Game Console Industry
Two-sided markets are composed of platform owners and two distinct user networks that either buy or sell applications for the platform. The authors focus on multihoming—the choice of an agent in a user network to use more than one platform. In the context of the video game console industry, they examine the conditions affecting seller-level multihoming decisions on a given platform. Furthermore, they investigate how platform-level multihoming of applications affects the sales of the platform. The authors show that increased platform-level multihoming of applications hurts platform sales, a finding consistent with literature on brand differentiation, but they also show that this effect vanishes as platforms mature or gain market share. The authors find that platform-level multihoming of applications affects platform sales more strongly than the number of applications. Furthermore, among mature platforms, an increasing market share leads to more seller-level multihoming, while among nascent platforms, seller-level multihoming decreases as platform market share increases. These findings prompt scholars to look beyond network size in analyzing two-sided markets and provide guidance to both (application) sellers and platform owners.
Journal Article
Does evidence of network effects on firm performance in pooled cross-section support prescriptions for network strategy?
Strategic prescriptions drawn from pooled cross-sectional evidence of firm performance effects are not necessarily warranted. This is because firm characteristics can influence both the mean and variance of firm performance. Strategic inferences are warranted if empirically observed effects reflect increases in mean firm performance. If they reflect increases in firm performance variance, however, such inferences are warranted only if the increased odds of achieving high performance compensate sufficiently for the concomitantly increased risk of realizing poor performance. Our simulation study, which contrasts firm performance effects in pooled cross-section and within-firm over time, counsels caution when basing strategic prescriptions on pooled cross-sectional studies of firm performance in general, and in the case of network effects in particular.
Journal Article
Quality Competition and Market Segmentation in the Security Software Market
In recent years, we have witnessed an unprecedented growth in the security software market. This market is now fiercely competitive with hundreds of nearly identical products; yet, the price is high and coverage low. Although recent research has examined such idiosyncrasies and found the existence of a negative network effect as a possible explanation, several important questions still remain: (1) What possibly discourages product differentiation in such a competitive market? (2) Why is versioning absent here? (3) How does the presence of free alternatives in this market impact its structure? We develop a comprehensive oligopoly model, with endogenous quality and versioning decisions, to address these issues. Our analyses reveal that, although the presence of numerous competitors leads to a greater need to differentiate, the network effect in this market works as a counterweight, incentivizing vendors to sacrifice differentiation in favor of collocating in the top end of the quality spectrum. We explain the reasons and implications of this important finding. We further show that this result is robust and applicable even when versioning by competing vendors or the presence of free software is taken into consideration. Furthermore, given that the presence of free software actually intensifies competitive pressure and heightens the need to differentiate, the role of the network effect in abating differentiation becomes even more discernible.
Journal Article