Summary Platform Economics and Marketing
Readings (textbook + articles), case studies & guest lectures1
Session 1 - Multisided platforms and network effects
Introduction - textbook
• Platform = entity that brings together economic agents with complementary needs and facilitates
interaction among them
o Positive network effects: value of interaction increases with number of participants
o Platform operates as a physical or virtual infrastructure
o One-sided platforms (social networks) and two-sided (or multi-sided) platforms
• Most platforms are digital but in the past also offline markets
• Platforms are intermediaries whose primary role is to manage network effects
• Not a platform when solutions don't put users in contact with one another
o Value should be dependent on how many users adopt the platform
• Platforms enable transactions while pipelines control them
• Platforms fare better than pipelines in terms of motivation and adaption
o Control paradox: control is important but platforms rely on others to get things done
o Pipelines fare better than platforms in terms of coordination
• Can combine platform and pipeline models: Amazon is a hybrid pipeline/platform model
• Pipelines can be platformized in two ways
o Encouraging interactions among existing customers: review and rating system
o Opening the doors to third parties
CH. 1 Understanding and activating network effects - textbook
• Network effects: when economic agents enjoy benefits that depend on decisions of other agents
o Positive: value of interaction increases when more agents participate in interaction
o Make interaction harder to organize: economic agents fail to consider the effects of their decisions
on other agents → external effects
• Platforms create value by managing network effects
o Platforms make agents realize the value they generate for one another
o Platforms reduce a variety of transaction costs, help participants coordinate their needs and
facilitate their interaction
• Two basic types of network effects:
o Same-side network effects (single groups of users)
o Cross-side network effects
• When platform links distinct group of users: two-sided platform or multi-sided platform
o Choosing how many sides to link is a major strategic decision for platforms
• Network effects make decisions of platform users interdependent
o Platform users care about participation and usage decisions of other users when they make their
own decisions
• Linkage map: tool to help you identify and understand various network effects - 3 kind of boxes
o 4 boxes on top-left: various types of network effects
▪ Cross-side network effects group 1 to 2 & 2 to 1, same-side network effects group 1 & 2
▪ First: 'sign' of network effects: positive (+), negative (-), or negligible (∅, unchanged value)
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Exam tip: make sure to study the lecture slides as well. In the exam of 2024 there were lots multiple questions
referring to examples that were discussed during the lectures.
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, ▪ Second: identify mechanisms whereby extra user adds/reduces value for others
• Explain the how & why
o Box on the right: 'hidden' network effects - effects that are not (yet) active on platform
▪ Effects for agents not directly connected to the platform but important for some users
o Box on the bottom: platform's external effects - effects on other stakeholders than own users
▪ Other effects that the platform may induce for non-users
o Example Linkage map of Airbnb: (understand how users affect one another)
• Linkage map shows who can affect whom, and how, on your platform (and beyond)
• Strategies to activate network effects: attract users to platform and allow smooth interaction
o Two crucial questions: attract which users first? And through which strategies?
o Discovery and matchmaking: provide effective tools to find 'match' - powerful search engine, filters
o Trust building and risk mitigation: rating and review system
o Transaction facilitation: provide users with services such as payment, security, logistics, etc.
o Digital technologies allow to cut into costs of these functions: AI-powered algorithms, rating systems
• Positive feedback loop: a self-enforcing process that magnifies the initial change
→ positive cross-side network effects
o Makes platform grow with little or no additional effect: like a snowball or flywheel
o Evaluate by measuring the time it takes for platform to reach a given number of users
• Negative feedback loop: positive cross-side network effects also imply if side A leaves, side B also leaves
o Make users hard to retain: therefore timing is of the essence for platform management
• Feedback loops heavily depend on users' expectations: chicken-and-egg problem, cold start, ghost town
o Optimistic expectations: believe that users on the other side will join, therefore join as well
o Pessimistic expectations: believe no user on the other side will join and don't join either
o What is expected turns out to be right: self-fulfilling prophecies
• Value proposition: value that users derive from a platform is interdependent
→ Value grows with the number of users
• Value creation: great deal of value is co-created by users themselves with platform as facilitator
o Positive feedback loops generate 'free value' and pessimistic expectation may impede value creation
o Create value by differentiating from competitors & take advantage of complementary market forces
• Value capture: how network effects shape the entire range of platform strategies
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, Peer-to-Peer Markets - By Einav, Farronato, Levin [Focus on section 1 & 2]
1. Introduction
• Peer-to-peer markets (eBay, Etsy, Airbnb) allow sellers to experiment with prices, selling mechanisms,
and strategies
• Peer-to-peer businesses make trade off between two objectives
o Designing market mechanisms that efficiently elicit and incorporate dispersed information
o Minimizing various forms of transactions costs to keep user experience convenient
2. Market design: search, pricing, and trust
• Goal is to create trade between large numbers of fragmented buyers and sellers
o Requires solving several core market design problems
2.1. Matching buyers and sellers
o Centralized process: Uber - customers specify service, drivers choose to respond, Uber needs to ensure
enough drivers
▪ Transaction costs are low for riders and drivers
o Decentralized process: Airbnb - facilitate individual product choice, when sellers are diverse
▪ Main challenge is to create streamlined and informative search process
o Presentation of search results matter: twice as likely to click on top position than one position down
2.2. Pricing mechanisms
o Auctions: allow prices to respond to market conditions - proxy bidding, surge-pricing algorithm,
proprietary algorithm
▪ Use has declined because of rising competition - instead fixed prices or hourly rates
2.3. Trust and reputation
o Trust can derive from up-front inspection, reputation, and external enforcement
o Use external regulations: limiting entry, certifying quality, or insuring against bad transactions
o Reputation or feedback mechanisms: easy to set up online, do have shortcomings - two-sided reviews
3. Peer production and traditional industries
3.1. Peers versus professional sellers
o Professional seller: has up-front costs to create # units of capacity and marginal costs - hotel, inventory,
employees
▪ Advertising advantage as they can spread fixed advertising cost over large number of sales
o Flexible or peer seller had unit capacity, pays no up-front costs, and has marginal costs
3.2. When is peer production efficient?
o If up-front costs of capacity are low or there are high marginal costs: peer entry will be difficult
o Higher capacity costs, means a larger price premium, and more frequent low-end marginal costs help
peer sellers
o Flexible sellers benefit the most from lower fixed costs
o Variability in demand favors peer production: best to have some capacity which operates only part of
the time
3.3. The rise of peer-to-peer markets
o New marketplace of platform requires investment cost: charging fees to recover investment
o Fixed fees or fees per transaction
4. Regulation of peer-to-peer markets
4.1. Entry and licensing standards
o Cities often tax and regulate number of hotel rooms, limit use of residential property, and cap the
number of taxis
o Regulation largely exists to protect consumers from unscrupulous operators or adverse market forces
4.2. Flexible workers and employment regulation
o Variability in demand can favor flexible work arrangements
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