M&E

want to attract the user that present the highest ratio between their attraction power (the CGNE they generate for users on the other side of the platform) and the cost needed to attract them.

• Marquee strategy
• Offer stand-alone value
• Tap onto an existing network (piggyback strategy)
• Generate positive expectations for users: commitment strategy
• Divide- and-conquer strategy
• Focus on niche market
• Start as a pipeline

• Marquee Strategy: users generate large cross-group network effects
  • Allows to attract relatively more users form the other side of the platform
  • generate pos. expectations regarding future growth of the platform
• Caveat: Input force may also be large because marquee users are also coveted by competing platforms

• Popular games on videogame consoles
• Marquee shops in malls primark
• opinion leaders on social media

• Provide value to users even if no one else is on the platform
  • allows to attract users that put relatively lower weight on network benefits
  • Easier to attract: they don't need the other group as much to value platform
• Stand-alone value: recording capabilty

VCR in 1980's

• VCR is a platform with content on one side and users on other
  • Useful to users only if they could get enough videocassettes to watch
  • Content owners make tapes only if enough people have VCRs

• Multiplicity of equilibria (self-fulfiling prophecies)
  • Pessimistiv expectations -> 'Null equilibrium'
  • Users in one group don't join if they believe that users in the other group won't join, and vice versa
• If possible, generate positive expectations (for at least one group)
  • Advertising, preannouncements, etc.

• Platforms can meake large upfront investment to signal that it's safe for a given group to join the platform.
  • Common strategy for platforms where a given group has to make large investments to participate, and fave large switching costs

Microsoft's launch of the Xbox

Microsoft had to convinve video game developers that there would be enough Xbox users for their games:

• Made a big deal about its commitment to spend $500M promoting the Xbox
• Committed to sell the Xbox at a low price to convice developers that there would be demand for the console and games

• A two-sided platfrom serves two distinct groups of users and can therefore set different prices for each group (focus: access fees subscription)
• This option is key to solving the chicken-and-egg problem, by way of a "divide and conquer" strategy.
• Divide: "Buy"the participation of one group (Guarantee them the utility they'd obtain if the other group joined)
• Conquer: Make other group pay to interact- with- certainty- with the first one

Rather thatn trying a new network, use one that already exists!

Paypal and eBay

• Paypal relied on the fact that eBay was the palce to be for person-to-person interactions and trade on the web
• Growing on eBay would guarantee Paypall growth over the Internet.
  • Paypal became the standard payment method on eBay, and successfully expanded beyond, with many websites taking Paypal as a payment system.

Target customers in a relatively narrow market where the platform can more easily build network

Yelp review platform

• Started focusing on ethnic food in San Francisco, which attracted dedicated reviewers and interested readers
• Word of mouth and participants' travel facilitated growth: other cities and then to sectors other than restaurants.
• Yelp expanded from reviews to other functions, such as accepting reservations, forwarding online orders, and offering discounts

• Integration with one side of may be necessary to induce participation on the other side.
  • The first gaming consoles were bundled with their own games
  • amazon started as a reseller before becoming a marketplace
• Disintegration may come at some later point in time
  • When an installed base of customers has been build or when expanding the supply of complements becomes a necessity.
• The two strategies often coexist
  • Netflix produces own content, video games consoels also produce their own games along with third parites

1. A set of economic agents wish to interact
2. The interaction generates NE: One agent’s decisions as to whether and how much to interact affect the well-being of other agents.
3. An intermediary is more efficient in organizing the interaction.

• NE make it hard for individuals to organize interactions, even if these are valuable for everyone.
• The benefit an agent gets from joining a network depends on how many other people join as well
  • If the agent doesn’t expect anybody else to join, she doesn’t join either
  • Everybody loses, even if all would be better off joining!
• Platforms can solve this coordination problem -> valuable interactions easier to organize by reducing transaction costs.
  • Basically, platforms sell transactions costs’ reductions (not necessarily sell a product)

Even with technology easing communication (e.g. FB groups to communicate between riders and drivers) a platform still adds a great deal of value by reducing transaction costs.

• Trust issues
• Help coordination -> Dispatch based on proximity

- Within- group NE (WGNE)

- Cross- group NE (CGNE)

How does an agent’s decision to join (or how much to interact on) the platform affect the well-being of other agents in her own group?

How does an agent’s decision to join (or how much to interact on) the platform affect the well-being of other agents in another group?

- Attraction spillover

- Mutual attraction spiral

- Attraction/ Repulsion pendulum

- No group is interested in connecting with other, so interaction should simply be avoided

Consider a case where a higher activity level in one group (A) makes it more attractive for the other group’s members (B) to increase their activity level, BUT the attractiveness is not affected in the opposite direction.

- Consider a case where a higher activity level in one group makes it more attractive for the other group’s members to increase their activity level and vice versa (pos. feedback loop).

-There is a pos. indirect NE for each group. For each group, an additional user negatively affects the whole group.

- A higher activity level in one group (A) makes it more attractive for the other group’s members (B) to increase their activity level

- By contrast, the first group’s members (A) tend to be repelled by a higher activity level of the second group (B).

(neg. feedback loop)

-There is a neg. indirect NE for each group. For each group, an additional user negatively affect, indirectly the whole group.

 No group is interested in connecting with the other, so interaction should simply be avoided.

• Not always easy to clearly identify distinct network effects.
• At first sight, easy to think that many platforms only manage an attraction loop (single group of users with pos. WGNE)
• In fact many of these environments turn out to feature both within-group and cross-group NE.

Digital technologies make it easier for intermediaries to connect agents interested in interacting (potential trading partners)

• Much less physical capacity constraints
• Can mange very large volumes of interactions between agents: Offer personalized recommendations and reduce search costs
• Offer reputation systems and improve trust
• Make it easier to coordinate agents’ needs and actions
• In other words, DT allow to reduce a large set of transactions costs

Traditional companies (aka "pipelines")control transactions by producing goods and services with their own means of production

• Make adjustments throughout the value chain to sell products (internal focus)