Positive, Negative, and Amplified Network Externalities in Platform Markets

Abstract

Platforms are a dominant model for coordinating complex economic interactions. Platforms are distinguished by growth through network effects: an increase in the number (N) of platform actors (or complements produced by them) on one side makes the platform more valuable for an actor on the same or other side (and vice versa). This paper unbundles the network effect—the feedback loop—into directional and distinct types of network externalities that define the value received by each platform side. For example, value from a network externality may relate to variety (e.g., Google Play apps) or availability (e.g., Uber rides). Furthermore, at times, network externalities can have a negative impact. Although the existing literature recognizes some of these constituents, we lack an integrative framework. To address this gap, we first distinguish the heterogeneity and persistence of platform value units to identify a 2 × 2 typology of four positive and negative network externalities: quantity versus rivalry, accumulation versus fragmentation, variety versus choice overload, and utility versus degradation. Second, we generalize network connectivity and horizontal complementarity as two types of network externality amplification. Third, we demonstrate how all these dynamics play together in interactions that ultimately underscore the platform value and growth.