Proceedings of the 51st Annual Meeting of the ISSS - 2007, Tokyo, Japan, Papers: 51st Annual Meeting

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A theoretical review of network effects on platform products

Kazuhiko Kato, Tatsuyuki Negoro

Abstract


Network effects are known as one of key mechanisms of being successful on platform product business in the current economic world. For examples, these accomplishments, such as VHS video, Microsoft windows OS and NTT Docomo i-mode exhibited network effects. The purpose of study is to present the different two concepts of network effects and four categories in platform products with layered structure i.e. platform leaders, complementary products and users.

Firstly, there have been many studies about network effects; however, almost all studies argued the influence to end-users, based on the network scale (the number of subscribers). This study alluded the necessity of network effects with the significance of linkages between members i.e. access frequency and weight, as well as the number of linkages between members.

Secondary, this study classified four categories between couples of layers among platform products, complementary products and users. Four categories are as follows,
1. Network effects between users:The increase of platform products’ users causes network effects between users
2. Network effects between complementary products (complementors) :The increase of platform products’ users causes network effects between complementary products (complementors).
3. Network effects between a user and complementary products (complementors):The increase of complementary products and complementors caused by the increase of platform products’ users generates network effects to users.
4. Network effects between a complementary product (complementor) and users :The spread of users caused by the increase of platform products generates network effects to complementors.

Consequently, this study offered two suggestions. Firstly, two different concepts regarding network effects i.e. the significance of linkages between members and the number of linkages between members were presented. Secondly, four categories between couples of layers among platform products, complementary products and users were classified, compared with 2 categories between products and users mainly by Katz&Shapiro. In addition, there was each actual case proved, which exhibited the difference concerning network effects in theory between this study and that of Katz&Shapiro.

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