session 5 Digital Platform

Question 1

when is a system called a platform?

Answer 1

the system must provide useful functions/services and allow for 3rd party access

Question 2

Products vs platform

Answer 2

Product have features
platforms have communities

Question 3

what are network effects

Answer 3

more users = more value = more users
value = willingness-to-pay for network participation (WTP) for platform affiliation = cap on platform fees
Rising network effects increase existing and prospective users’ WTP

Question 4

Direct vs Indirect Network effects

Answer 4

Direct Network Effects: Value to me depends directly on the number of users (e.g. whatsapp)
Indirect Network Effects: Value to me depends on the adoption of some complementary products (e.g. ride sharing, G Suite products)

Question 5

What are the four types of network effects?

Answer 5

Positive Same-side Effects: network effects created by the impact of users from one side of the market on other users from the same side of the market: effects consumers have on other consumers, or producers have on other producers
Negative Same-side Effects: network traffic: if hundred of people use it, the network of others will actually slow down. -> congestion problem
Positive Cross-side Effects: the effects that consumers have on producers and vice versa. When uses benefit from in increase in the number of participants on the other side of the market
Negative Cross-side effects: when the network reduced its quality because of over occupation

Question 6

platform pricing: the four different price arrangement for platforms

Answer 6

1. transaction cut: charge a fee for facilitating transaction (airbnb, etsy)
2. Pay for access: Charge fee for facilitating lead generation, charge side that needs the other more (tinder)
3. Attention: Charge fee for similar match (advertise on platforms: Facebook, Youtube)
4. Pay for tools: charge fee for better / upgraded tools, basic version often free (Linkedln)

Question 7

What is supply side economics of scale

Answer 7

• falling average costs, monopolistic supply.
• e.g: utilities
• supply side scale economies are realized when firms reduce unit costs by leveraging fixed costs or experience effects. With high fixed costs and low unit cost, average cost declines with volume

Question 8

What is demand side economic of scale

Answer 8

• Value grows with volume, monopolistic demand, often falling average costs
• e.g Social media, operating system
• network effects = demand side economies of scale

Question 9

What is platform envelopment

Answer 9

one platform provider adding another platform’s functionality to its own and then offering a multiplatform bundle

Question 10

threats of platform envelopment

Answer 10

can afford aggressive pricing, installed customer base, cross-marketing, customer retention
Example: facebook’s integration of instagram

Question 11

3 types of platform envelopment attacks

Answer 11

1. foreclosure attack (complement):A network market consists of several players operating in various adjacent layers. A player tries to gain a dominant position in the adjacent layer by bundling the services the adjacent layer player provides in its own offerings.
2. Intermodal attack (weak substitute): Price a person is willing to pay for a bundle consisting of two perfect substitutes will be the one which he uses either of them and hence there would be no value for a firm to envelope a platform which acts as a perfect substitute for its own offering. However, there is a value to be created when we have in question a set of weak substitutes.
3. Conglomeration attack: (functionally unrelated): A conglomeration attack means that platforms are functionally
   unrelated but may share common users and components