Lecture 8: Network Effects and Platform Ecosystems

Question 1

What is Metcalfe’s law?

Answer 1

The value of a network to a user is asymptotically proportional to the square of the number of users

Question 2

What are congestion effects?

Answer 2

• Negative network effects

- An additional network user decreases the value of the network to all other users

Question 3

What are three value sources in networks?

Answer 3

1. Exchange - large number of users results greater reach for exchanging products and services
2. Staying in power - large number of users suggests a strong market position and that initial time investment is not waster
3. Complementary benefits - Additional third party products that provide additional value to network users

Question 4

What are platform ecosystems?

Answer 4

1. Platforms actively encourage third-party providers to integrate products and services (apps) with their software
2. They provide environment that makes it easy to fit the product to the platform software
3. Platforms often integrate cloud-based infrastructure for developers

Question 5

What are one-sided and two-sided markets?

Answer 5

1. One-sided market: Large share of value is derived from a single class of users (messaging)
2. Two-sided market: Value is derived from two categories of network users (airbnb)

Question 6

What are same-side exchange benefits and cross-side exchange benefits?

Answer 6

Same-side benefits: Increasing value to a class of users results in an increase in the number of users from the class

Cross-side benefits: Increasing value to a class of users results in an increase in the number of users from another class