Platform Externalities

Network effects have been theorized as the defining growth mechanism in platform markets. The increase in the number of platform participants (N) fuels a virtuous cycle of growth—a network effect. However, beyond this superficial view, what are the causal mechanisms for increasing value in platform markets? To answer this question, we change the level of analysis to the externality level and propose the new construct of the platform externality with three specific contributions. First, we expose three causal factors—value unit heterogeneity, value unit perception, and value unit superadditivity—which affect platform externality. Second, using these factors, we identify four types of platform externalities—quantity, variety, utility, and accumulation—and clarify the roles of network connectivity and complementarity. Third, we highlight the negative counterparts for platform externalities, which typically self-correct growth in platform markets. Our explicit theorization calls for delineating platform strategy theories that rely on network effects to recognize distinct positive and negative platform externalities. Further, our theorization opens new research avenues for mathematical modelling of dynamics in platform markets.