Platform Externalities: Beyond the N In Network Effects

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 the N, what are the distinct qualitative attributes that drive the increasing value for a particular side of a platform as the number (quantity) of participants increases? To answer to this question, we develop a theory of platform externalities to provide three novel contributions to the understanding of platform markets. First, we clarify the role of network externalities and network effects in causing the self-reinforcing growth of value in platform markets. Second, to move beyond the N, we identify four specific externalities in platform markets - quantity, variety, utility, and accumulation - which we call platform externalities. We also clarify the role of complementarity in case of variety and accumulation externalities. Third, we highlight the negative counterparts for each of the four platform externalities. Our explicit theorization calls for delineating platform strategy theories that rely on network effects to recognize distinct platform externalities and their negative counterparts