Lecture 2 Platform Business Models

Question 1

Definition network effect & network economics

Answer 1

In economics and business, a network effect (also called network externality or demand-side economies
of scale) is the effect that one user of a good or service has on the value of that product to other people.
When a network effect is present, the value of a product or service is dependent on the number of others using it.

Network economics refers to business economics that benefit from the network effect

Question 2

Network effect explained (Metcalfe’s Law)

Answer 2

nodes n, edges e

e = (n-1) * n/2

Value network ca. = e

Question 3

Tipping point, critical mass, and path dependence

Answer 3

Tipping point: (Perceived ) value of adoption > Cost of adoption to user

Question 4

Lock-in
What are CSC?

Answer 4

• Collective switching costs (CSC) are costs of making an alternative technology attractive
• CSC may increase over adoption
• CSC prevent from switching to another technology

Question 5

Positive and Negative Network Effects

Answer 5

Positive: when each new node adds value to all
other nodes
New user of Facebook (same side)
New company in coople (cross-side)

Negative: When the removal of a node adds value
to all other nodes
New car on congested road (over-use)
New fake employee on coople (wrong use)

Question 6

Supply side and demand side economics of scale
Describe both.

Answer 6

Supply side economics of scale = “classical” economics of scale
− Every additional product sold creates value on the production / cost side
− Cost advantage through learning curve
− Buying power
− Tools

Demand side economics of scale = network effect
− Every additional user generates direct value to existing users

Question 7

Define Digital Platforms (what is the difference to linear pipeline businesses?)

Answer 7

Unlike linear pipeline businesses, platforms are intermediaries that bring different sides of a market together.

Digital Platforms
* … are intermediaries that bring together different user
groups in multi-sided markets.
* … provide digital infrastructure and rules that enable
transactions between groups.
* … can take many forms.

Question 8

Key features of platform companies

Answer 8

Key elements: Participants, Value unit, Filter
Nucleus & Expansion: -, Core Interaction, -
Functions: Pull, Facilitate, Match

Question 9

Same Side vs Cross Side Network Effects

Answer 9

Same side (direct) network effects relate to
one side of the market.

Cross side (indirect) network effects relate to the
interactions between the different sides of the market.

Question 10

Two-Sided Market

Answer 10

Definition
− A two-sided market facilitates interactions between multiple interdependent groups of customers.
The value of the platform increases as more groups or as more individual members of each group
are using it. The two sides usually come from disparate groups, e.g., businesses and private interest
groups.

Question 11

Business model pattern peer-to-peer

Answer 11

• Definition
  − This model is based on a cooperation that specializes in mediating between individuals belonging to
  a homogeneous group. It is often abbreviated as P2P. The company offers a meeting point, i.e., an
  online database and communication service that connects these individuals (these could include
  offering personal objects for rent, providing certain products or services, or the sharing of information
  and experiences).