![]() Consider a social network, such as Linkedin. Within-group effects usually mean the impact of the addition of one more participant to a network on other participants in the same group. The presence of cross-group effects on digital platforms, particularly when they are positive on both sides, may have a considerable impact on market structure. The figure above schematically shows the different types of network effects that can arise in two-sided platforms. For example, congestion is a negative network effect whereby having too many users on the platform can degrade the value of using it.īecause platforms may have two or more sides, the network effects can be within-group, when a new user affects the value of the platform for all other users on the same side but it can also be cross-group, when an additional user makes affects the value of the platform for users on the opposite side. But there may be different effects for users on either side of the platform, and the impact of a new user may be either positive or negative, depending on the application being supported by the platform. For each new user that joins the platform, the existing user base is affected. In the case of digital platform, analysis of externalities or network effects is more complicated. So, the utility of Google to both existing consumers and advertisers is affected by the actions of a new consumer joining the platform. This, in turn, marginally enhances the utility of Google advertising to all consumers. This action has no direct impact on existing consumers, but it creates a marginal benefit for advertisers (who now have slightly more data to work with when setting their advertising algorithms). With this information, advertisers target consumers more efficiently whenever they are online and searching the Internet.Ĭonsider the impact of a consumer starting to use Google’s services. In turn Google will collect information regarding consumers’ behaviour while searching (anonymously and/or in aggregate form so as to preserve privacy) and then sell to interested advertisers. ![]() They will pay an Internet service provider (ISP) a monthly fee for connectivity but they will not pay Google for making the search. The users on one side have no direct relationship with the users on the other side of the platform, but each is affected by the presence of the other.Ī typical example is that of consumers accessing Google to search the Internet. Externalities arise from digital platforms because they act as economic agents matching two distinct groups of users, one on each side of the platform. Externalities (which are also known as network effects ) are an economic concept: they are a cost or benefit of an economic activity experienced by a third party which has no relation with the one causing the activity. One of the reasons why digital platform are special is the presence of externalities. Explanation of externalities on digital platforms
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