Rolling the Dice
How to resolve demand uncertainty in markets with partial network effects
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Written by Joe N. Ploog and Joost Rietveld.
When it comes to network effects, we tend to assume that they benefit all competing products in the same way. But what if the presence of network effects was a strategic choice rather than a market-level feature? In markets with partial network effects, some products leverage social features for added network value whereas others do not.
A manager’s decision to incorporate network effects is a strategic gambit that can amplify both the rewards and the risks of a product’s commercial launch.
Take video games for example: multiplayer titles like Fortnite are designed for user interaction, while single-player games such as the Legend of Zelda series are made for standalone experiences. Our research article, Rolling the Dice: Resolving Demand Uncertainty in Markets with Partial Network Effects, that is forthcoming in the Academy of Management Journal, examines how ‘network products’ (products designed around user interactions) and standalone products compete side by side in the global board games market. We uncover key insights relevant to both digital and physical products.
The context: Board games
The board games industry provides a rich setting for studying partial network effects. Board games like Magic: The Gathering and Warhammer 40k create value by facilitating trading collectible components and large-scale competitive interactions, while traditional board games (such as Monopoly) do not offer such social features. To illustrate, imagine you own a copy of Monopoly and decide to host a games night. You do not want any of your friends to bring their copy of the game, since there are no complementarities in doing so. However, if you own Magic trading cards, you do want your friends to bring their own cards, giving you the chance to enhance your collection by trading and competing against each other. When does it pay for board games to add such collectible components, and when might it hurt performance?
Key findings: Demand uncertainty and product diffusion
Our analyses of nearly 20,000 board games based on data from BoardGameGeek.com reveals that network products face higher demand uncertainty than standalone products.
Demand uncertainty refers to the challenges consumers may face in assessing a product’s future value, especially when that value depends on how widely the product is adopted. At launch, the value created by network products is highly uncertain: with no existing user base, network value effectively is non-existent (imagine having to sell the very first telephone without having anyone to make calls to…). Potential buyers cannot fully gauge whether a network product will reach critical mass either, making them hesitant to adopt the product early on. This introduces demand uncertainty around whether—and to what extent—a product’s network value will materialize.
Our research further identifies three strategic factors that can either enhance or reduce demand uncertainty in network products:
Product novelty: While novel and innovative products can attract early adopters, they also raise consumers’ perceived risks, particularly for network products that rely heavily on rapid diffusion. Our research shows that while most innovative products tend to diffuse less rapidly than less novel products, novel network products suffer the most because they need a critical mass of users to create value.
Early adopters: Interestingly, our findings show that while a board game’s success on crowdfunding platforms like Kickstarter is generally advantageous, it tends to benefit standalone products more so than it does network products. Network products need consistent buzz, which can be a challenge to maintain in between concluding a crowdfunding campaign and a product’s wider commercial launch.
Competition: Competition intensity hinders the diffusion of network products more than it does standalone ones. This is because consumers are much more likely to be spread across multiple products instead of converging on just one product that benefits from large user numbers. Similarly, the presence of a ‘hit’ competitor is particularly detrimental, as network products face an uphill battle when a popular alternative has already captured a large share of the market.
In our sample of 19,432 board games, we found that games that launch with collectible components such as trading cards, collectible dice, or miniatures tend to have comparatively fewer owners (compared to standalone board games without such collectible components) two years after their release if they: 1) are designed based on highly novel gameplay mechanics; 2) are brought to market through a successful crowdfunding campaign on Kickstarter; and, 3) are released at times when the market is facing strong competition, including from a hit game.
Takeaways for managers
For managers who consider adding social features to their products, our study provides two main takeaways: First, network effects are far from guaranteed. Embedding network effects through social features is a deliberate decision, and while it can add value, it also significantly raises the stakes. Network products are inherently risky, especially when user adoption fails to reach critical mass.
Second, managers should anticipate drivers of demand uncertainty, such as product novelty and competitive intensity. For instance, launching a highly novel network product in a crowded market, or a market dominated by one or a few hit products, can hinder diffusion. Cautious consumers will likely delay their adoption of such products.
[M]anagers who choose to add social features to their products are rolling the dice—they may win big, but they could also lose it all.
While it is true that successful network products can capture all or most of the demand in a market, it is also true that such products can get locked out of the market more quickly than standalone products. Thus, managers who choose to add social features to their products are rolling the dice—they may win big, but they could also lose it all. We have highlighted how three product launch strategies—novelty in design, attracting early adopters, and competition intensity—interact to either enhance or reduce the chances of a network product becoming a winner!
This blog is based on Joe and Joost’s research, which is published in the Academy of Management Journal and is included in the Platform Papers references dashboard:
Ploog, J. N., & Rietveld, J. (2024). Rolling the dice: Resolving demand uncertainty in markets with partial network effects. Academy of Management Journal, (ja), amj-2023.
We are pleased to have won the Platform Leaders Academic Prize for our article Rolling the Dice. Each year, Platform Leaders awards a prize to an academic paper that demonstrates exceptional relevance and practical applications to the business world. Joe recently presented our findings at the Platform Leaders conference, discussing its business implications, alongside a specially commissioned illustrated video produced by Launchworks & Co. Thank you Launchworks & Co for this awesome recognition!
Platform Papers is curated and maintained by Joost Rietveld.