Winner-Take-All in Networked Markets

Submitted by: Group 9

Anirban Bhar Ankit Agarwal

Sahil Jindal
Deepak Jangid Ritika Kathuria

What it means?

The winner reaps all the benefits while loser faces extinction. Decisions for the aspiring platforms:
A) B)

Should they enter the new market at all? If yes, what should they seek to preserve proprietary control over their platform or share it with competitors?

Discussion points
Platform: Definition and key concepts
Factors influencing the success of WTA Framework to predict the platform structure

Platform Structure

Traditional markets =

Buyers

Sellers

Networked markets

Buyers

Platform

Sellers

Platform sponsor + Platform provider Platform sponsors: Act as gatekeepers and platform modifiers Platform Providers: Mediate the network users interactions

Scope of discussion

Types of networks:
A) One-sided
B) Two-sided C) Three-sided
Example: e-mail users Example: Card holders and merchants for credit cards Example: You-tube: Content consumers, content providers, advertisers

Focus on : A) Platform structure B) Competition between the platforms and not within the platforms Types of platform structures:
A) Multi-Homing : Most users use more than one platform B) Mono-Homing: Most users work with only one of the competing platforms C) Mixed-homing: Percentage-wise segregation of users

Factors Influencing Platform Structure

Natural Monopoly

Factors

Multi-homing costs Strength of network effects

Users preference for differentiated functionality

Factors Influencing Platform Structure

A) Natural Monopoly :
Characterized by : A) Increasing returns to Scale B) Large MES ( Minimum Efficient Scale) C) High Fixed costs

B) Multi-homing costs:
Encompasses : A) Platform-specific investments B) Out-of-pocket expenses C) Inconveniences borne by users affiliation with the platform
Can be off-set by tenure and/or volume related benefits, and by salvage value at termination of relationship Costs can be duplicated a user participates in other networks

Factors Influencing Platform Structure

A)

Strength of network effects :

- Positive and strong effects lead to use of a single platform - Value derived from access to other users is highly specific

Value: Maximum price that the focal user would pay a platform provider for the ability to interact with a potential transaction partner.

In a networked market served by a single platform a focal user should be willing to affiliate with the platform whenever Vp + I H
Vp = sum of value form access to potential partners I = value derived which is independent of network effects H = Homing cost

Network effects would be high in case of user requires: i) Liquidity ii) Novelty iii) Mobility

Factors Influencing Platform Structure

A)

Platform Differentiation:
- Homogenous needs favor use of single platform - Heterogeneous needs stimulate need of multiple platforms

Decision rules for multi-homing:

Step 1 : Vp + I H : Compare the value derived from different platforms
Step 2 : Calculate the incremental value from multi-homing on different platforms to the base-case of mono-homing
Transaction specific Vs Generic Differentiation

Predicting platform structure

Assumptions I
Assumptions II

Cross-side network effects are positive in both directions and same-side network effect on both sides are either neutral or positive. Network users cannot influence platform structure.
- May not held when the user base on at least one side is highly concentrated

Outcomes

WTA outcomes Mono-homing outcomes Mixed-Mode Outcomes

WTA Outcomes

Scenario #1
1. 2. 3.

Multi-homing costs are high on both sides At least one side uniformly exhibits a strong preference for transaction partner variety Neither side has a strong preference for differentiated platform functionality

Example: Market for DVDs

Scenario # II
1. 2. 3.

Multi-homing costs are high on only one side That side exhibits a strong preference for transaction partner variety Neither side has a strong preference for differentiated platform functionality

Example: Adobes PDF Reader

Mono-Homing Outcomes
Likely to observe mono-homing on side A and multi-homing on side B when: Conditions
1. 2.

Side A has high multi-homing costs and strong preference for transaction partner variety that cannot be offered selectively Side B has low multi-homing costs and strong preference for transaction partner variety

Example: WiFi WLAN Standards : 802.11a and 802.11g

Mixed-mode Outcomes

Some users on each side mono-home due to

-

Strong preference for differentiated platform functionality transaction specific- and a relatively weaker preference for transaction-partner variety.

The remaining users on each side multi-home due to a stronger preference for variety.

Thank You