Submitted by:

Group 9Anirban Bhar

Ankit Agarwal

Sahil Jindal

Deepak Jangid

Ritika Kathuria

Winner-Take-All in Networked Markets

What it means? The winner reaps all the benefits while loser faces extinction. Decisions for the aspiring platforms:

A) Should they enter the new market at all?B) 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 SellersPlatform

Platform sponsor + Platform provider

Platform sponsors: Act as gatekeepers and platform modifiersPlatform 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 structureB) Competition between the platforms and not within the platforms

Types of platform structures:A) Multi-Homing : Most users use more than one platformB) Mono-Homing: Most users work with only one of the competing platformsC) Mixed-homing: Percentage-wise segregation of users

Factors Influencing Platform Structure

Factors

Natural Monopoly

Multi-homing costs

Strength of network effects

User’s preference for differentiated functionality

A) Natural Monopoly : Characterized by :

A) Increasing returns to Scale

B) Large MES ( Minimum Efficient Scale)

C) High Fixed costs

Factors Influencing Platform Structure

B) Multi-homing costs: Encompasses : A) Platform-specific investmentsB) Out-of-pocket expensesC) 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

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

Factors Influencing Platform Structure

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 partnersI = value derived which is independent of network effectsH = Homing cost

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

A) Platform Differentiation: - Homogenous needs favor use of single platform

- Heterogeneous needs stimulate need of multiple platforms

Factors Influencing Platform Structure

Transaction specific Vs Generic Differentiation

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

Predicting platform structure

Assumptions I Cross-side network effects are positive in both directions and same-side network effect on both sides are either neutral or positive.

Assumptions II Network users cannot influence platform structure.- May not held when the user base on at least one side is highly concentrated

Outcom

es

WTA outcomes

Mono-homing outcomes

Mixed-Mode Outcomes

WTA Outcomes Scenario #1

1. Multi-homing costs are high on both sides2. At least one side uniformly exhibits a strong preference for transaction partner variety3. Neither side has a strong preference for differentiated platform functionality

Example: Market for DVDs

Scenario # II1. Multi-homing costs are high on only one side2. That side exhibits a strong preference for transaction partner variety3. Neither side has a strong preference for differentiated platform functionality

Example: Adobe’s PDF Reader

Mono-Homing Outcomes

Conditions1. Side A has high multi-homing costs and strong preference for transaction partner variety that

cannot be offered selectively2. Side B has low multi-homing costs and strong preference for transaction partner variety

Example: WiFi WLAN Standards : 802.11a and 802.11g

Likely to observe mono-homing on side A and multi-homing on side B when:

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