Five Ways to Boost Platform Growth
How to harness the power of network effects
Platform Papers is a blog about platform competition and Big Tech. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.
Written by Kimmo Karhu, Mikko Heiskala, Paavo Ritala, and Llewellyn Thomas.
Platform growth often stems from network effects—self-reinforcing feedback loops—where an increasing number of participants on one side of the platform feeds growth in participants on the other side, and vice versa. For example, the more app developers (and apps) there are in a smartphone platform, the more users it attracts. And vice versa, the more users (the bigger the market) on a platform, the more developers decide to develop and publish their apps on the platform.
But there is more to network effects than only the increasing number (N) of participants. For example, do distinct sides perceive the benefit of increasing N on the other side the same way? Can a positive benefit turn negative? And if so, how? Furthermore, many platforms host more than two sides. In what ways can multiple network effects be leveraged in combination to boost platform growth?
We unpack five ways how network effects can be leveraged for platform growth.
1. Understand the Value Unit For Each Direction of the Network Effect
Each side of a platform perceives increasing value differently, and for different reasons. For example, while users appreciate more apps, developers appreciate the presence of users, who potentially buy their apps. Apps and presence are value units that are distinct and tied to each direction.
To be clear (and while some economists may disagree), we call each direction a network externality, i.e., a platform side perceives increasing value from activities of ‘external’ actors who are on the other side. This means that the network effect is the resulting feedback loop consisting of the two network externalities in a loop. Network effects can also arise on a single side based on a single network externality, e.g., the more your friends are on Facebook, the more likely you will join it as well.
The main point: identify the specific value unit for each side, and see which direction these flow.
2. Leverage Four Distinct Types of Network Externalities
Not all network externalities are created equal. Value units across platforms (and across sides) differ based on heterogeneity and persistence. Heterogeneity of value units reflects the variety of the offerings on a platform. In contrast, persistence of value units reflects the way value units either tend to accumulate or are more transient. By combining the heterogeneity and persistence of value units, we can identify four types of positive network externalities. Each of these—quantity, variety, accumulation, and utility—deliver distinct types of increasing value to platform participants (see figure below).
Quantity is the classic ‘N’. The increasing number (count) of participants on a platform, which makes it more valuable to the other participants.
Accumulation occurs when the value of the platform accumulates (and does not just ‘count up’) as there are more value units on a platform. For instance, in Wikipedia, new information accumulates and builds upon prior information.
Variety is the bread and butter of app stores. The greater the variety of apps, content, videos, etc. for a user, the better. So this is not just the count or accumulation of things, but how varied they are.
Sometimes you just need a ride - like an Uber drive. You need it here and now. This is the utility externality. Instead of the number of value units, the value unit needs to be available and accessible at the right time.
The key takeaway here is to identify the different types of network externalities for your platform.
3. Network Externalities May Turn Negative
More may not necessarily be better. Network externalities can turn negative. The four types of network externalities discussed above allow us to classify four negative network externalities. These negative externalities act as ‘counter forces’ or ‘counter balances’ against the positive growth drivers.
Quantity vs rivalry: While the number of platform participants is typically viewed as positive, supply-side actors can experience rivalry or ‘crowding out’, as more and more similar suppliers join a platform. Similarly, users or consumers can experience ‘congestion’—that is, they compete for access to platform services or transactions. This is especially relevant for tangible goods and services that do not scale easily.
Accumulation vs fragmentation: While more information is great for accumulation platforms, such as Wikipedia, Reddit or Stack Exchange, sometimes there can be too much information. The benefits of accumulation can turn into the negatives of fragmentation. For instance, too much information can result in conflicting suggestions to a particular problem, making it difficult to find the right suggestion.
Variety vs choice overload: Variety in platforms such as Google Play or YouTube is great from the user’s perspective. However, too much variety can challenge those who need to choose from and sample such large-scale variety. There are increasing cognitive and search costs involved with finding the most interesting, useful, or accessible value units.
Utility vs degradation: On utility platforms, with more and more value units there is increasing likelihood that users get access to the right value unit at the right time (e.g., an Uber ride). However, with increasing access, there is a possibility of "bad apples", which can affect the overall value of the platform by creating negative experiences.
Thus, be aware of negative network externalities. Positive network externalities can turn into negative ones over time.
4. Use Horizontal Complementarity To Amplify Network Externality
Horizontal complementarities are cross synergies that exist between a platform’s complements. For instance, on app stores, synergies can occur between apps and on Wikipedia it is cross-linked content. Horizontal complementarity further amplifies the network externality value over and above the collective value of complements. Just as connections between clusters of individuals in a social network increase its value to those individuals, horizontal connections between groups of complements can amplify the value derived from a network effect.
Horizontal complementarities can be enabled in four ways:
Platform design: The platform owner can provide boundary resources to foster interoperability between complements. For instance, Wikipedia offers wikilinks for articles to link to each other.
Open standards: Open standards can enable interoperability between complements independently of the platform design. For instance, HTML or RSS standards.
Peer-to-peer integration: Sometimes two or more complementors may work directly together to increase interoperability of their offerings.
Portfolio integration: A single complementor may strategically integrate its portfolio of offerings. For instance, see the integrations between Microsoft Office, Teams, and One Drive on various platforms.
The key point here is to recognize the amplifying role of connectivity, and how horizontal complementarities can supercharge growth from network effects.
5. Orchestrate Multiple Network Externalities To Reinforce Growth
A final tactic is to orchestrate different network externalities to drive growth. Different network externalities can interact positively or negatively across sides of the platform. The more sides there are in a platform, the more opportunities there are for these interactions.
Network externalities may positively reinforce each other, and there are some distinct patterns. For instance, the same-side boost pattern consists of a same-side network effect on both sides of the platform. For instance the iMessage or Facetime feature on iPhone boosts growth beyond the main cross-side network effect (users and apps). The double cross-side pattern is relevant for multisided platforms, in which there are two producer sides that feed the growth of the user side. Consider for example Android developers and hardware manufacturers feeding the growth of the user side.
Alternatively, network externalities can balance each other out and hinder platform growth. The balancing effect pattern occurs when a negative network effect, such as rivalry on the producer side, balances the growth of the positive cross-side network effect. The boomerang effect consists of a positive network externality turning negative for the same side, such as variety turning into choice overload. Finally, the collateral effect occurs when the negative effect is felt on the ‘outsider’ side. For example, while the variety of devices is good for the user side, developers typically struggle to deal with the increasingly fragmented installed base.
Conclusion
Network effects are among the most prevalent drivers of platform growth. We have discussed five ways how network effects can be leveraged for platform growth. Key to understanding network effects are value units, distinct types of network externalities, and their dynamics and interactions. These are crucial for making informed choices over strategy, competition, and policy in platform markets.
This blog is based on the authors’ research, which is published in the Academy of Management Perspectives and Innovation: Organization & Management and is included in the Platform Papers references dashboard:
Karhu, K., Heiskala, M., Ritala, P., & Thomas, L. D. (2024). Positive, Negative, and Amplified Network Externalities in Platform Markets. Academy of Management Perspectives.
Thomas, L. D., Ritala, P., Karhu, K., & Heiskala, M. (2024). Vertical and horizontal complementarities in platform ecosystems. Innovation: Organization & Management.
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