chapter  4
9 Pages

Economic characteristics of platforms

This chapter reviews some of the key economic principles underpinning platform businesses. Positive externalities are important for platforms, since when a platform grows, both in terms of number of transactions and participants; it becomes more valuable to all. The tipping point is therefore an inflection point that, in the case of platforms, is often synonymous with reaching critical mass. In the context of platforms, multihoming simply means participating in more than one platform. The platform itself can shape the decisions of its participants by trying to seek exclusivity, reducing switching costs from other established platforms or trying to appear as the 'winning' platform, through advertising and endorsements, to make sure users don't feel the need to look elsewhere. The distinction between substitutes and complements is useful to better understand the disruptions brought about by platform businesses. It is worth noting that network effects can also be induced by platforms and maximized or internalized through platform design and governance decisions.