M&E

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)

• simply enable interactions between agents (external rather than internal focus) and do not own the means of production
  • Airbnb doesn't own real estate, Uber doesn't own cars, YouTube or FB don't produce any content

• Want to identify the underlying forces behind various platforms’ strategies
• Want to understand how platforms compete.
  • Which exact activity is performed is of second order.
• Useful to distinguish platforms according to their emphasis on:
  • Value creation: which are the network effects that the platform needs to internalize?
  • Value capture: which revenue (business) model, or monetization strategy, does the platform use?

which are the NE that the platform needs to internalize?

which revenue (business) model, or monetization strategy does the platform use?

- 2-sidedness can be added as a way to extract revenues from value creation

- Ex: FB, Amazon, Google search

- 2 sidedness is main attractiveness of such platforms and is therefore at the core of value creation

- can also be combined with a "freemium strategy" that offers a base version for free

- Ex. with WGNE focus: Spotify, Netflix

- Ex. wtih CGNE focus: Uber, Airbnb, Tinder

- The service is typically bundled with advertisitng / personal data transfer

- No monetary payment, but shadow cost of 

        - Exposition to ad nuisance, disclosure of personal data

         - Whether these are considered "bads" by consumers is an empirical question

         - Ex. FB (WGNE focus), Youtube (CGNE focus)

• Help “buyers” and “sellers” search for feasible contracts (mutually advantageous trade)
• Examples: Ebay, Booking.com

• Help members of one group find the right match in another group
• Examples: Monster, Tinder

• Enable interaction between providers and consumers of services
• Examples: airbnb, Uber

• Advertising- supported content to viewers and sell their attention to advertisers
• Examples: The NewYork Times, the Huffington Post

• Provide a method of payment to buyers and sellers
• Examples: Amex, MasterCard, Paypal

• Allow applications developers and users to interact
• Examples: Android, Microsoft, PlayStation

• Link entrepreneurs to funders
• Examples: Indiegogo, kickstarter, gofundme

when a consumer's wilingness to pay for the good depends positively on the size of the corresponding network

all players choose mutual best responses

-> no player has an incetive to deviate (choose another action / strategy)

each player takes an action that leads to the highset payoff given the action taken by the other players

1. if both consumers believe no one will buy, they find the price too high and don't buy, confirming their initial belief

2. If both consumers believe both will buy, they find the price low enough and buy, confirming their initial belief 

1. Unpredictability: It is impossible to say wheter consumers will buy or not

2. Potential Inefficiency: Both consumers are better off in the equilibrium where they buy, yet it could be that they end up in the equilibrium where none buys

at equilibrium the actual network size is equal to the expected one meaning that expectaions are fulfilled

1. consumers differ in their valuation of the stand-alone benefit

2. consumers differ in their valuation of the network benefit

1. no consumer joins

2. all consumers join

3. only a share joins

a larger network negatively affects the price
 

higher expected network size raises consumers willingness to pay (meaning that higher prices are compatible with larger networks)