The second report in our series dealing with networks, platforms, markets and the economics of order (pdf, 26 pages). Details below, with a link to a downloadable pdf table of contents.
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Networks and platforms are fashionable topics. Unfortunately, much industry commentary confuses or combines the two concepts even though they are very different. One important result has been a failure to identify the essential characteristic of networks. The purpose of this report is to disentangle the two concepts. In so doing, we determine the core output of networks and distinguish it from the purpose and nature of platforms. This in turn makes clear what networks and platforms not only have in common, but how fundamentally they differ. We explore some of the practical differences and implications of those differences. The process yields profound insights into the nature of networks in particular — insights which, as we will see in this and future reports, have far-reaching implications.
We discover the source of the value in networks, show how the network effect is a component of this source of value and explain the underlying behavioural basis for the network effect. Along the way, we also distinguish between platforms and conventional firms and identify what factors tend to favour the emergence of platforms. We also generalize, in a more fundamental economic sense, common characterizations of platforms that are overly narrow and arbitrary.
Finally, using the insights provided by our analysis, we dispense with two misconceptions common in the antitrust, regulatory and policy fields regarding networks and platforms. These misconceptions are the direct result of a previous failure to understand the core nature of networks and platforms.
The New Economics of Order