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Platforms and Network Effects - Coggle Diagram
Platforms and Network Effects
Platform
Business model that enables interactions between external producers and consumers
Facilitates value creation through matchmaking and exchange
Airbnb, Uber, Alibaba, Facebook
Without owning rooms, without owning cars, no inventory, not creating content
Characteristics
Rely on network effects
More users = More value
Use data and reputation systems
Reduce transaction costs and build trust
Invert the firm
Focus shifts from internal control to external orchestration
Transformed Industries
Education, Media, Finance, Health, Transportation, Retail
Coursera, YouTube, Bitcoin, Cohealo, Uber, Amazon
Pipeline vs Platform
Pipeline
Internal production
Controlled by firm
Linear value chain
Platform
External contribution
Governed by ecosystem
Multi-sided interaction
Why Platforms Win?
Sale faster by using external resources
Eliminate gatekeepers (editors, managers) and rely on community feedback
Unlock spare capacity (unused rooms, idle cars)
Network Effects
Price & Brand Effects vs Network Effects
Brand Effects
Build recognition and trust
Costly, less scalable
Network Effects
Users attract more users
Long-lasting, self-reinforcing
Price Effects
Attract users with discounts
Temporary
Demand Economies of Scale
Platforms grow through demand-side scale
User participation drives value
Traditional firms grew through supply-side scale
Mass Production
Uber’s growth cycle — more drivers → shorter wait times → more riders → more drivers
Scaling Network Effects
Platforms must enable frictionless entry
Easy onboarding for users
Google scaled better than Yahoo
By using algorithms instead of human editors
Side switching: Users can switch roles
E.g., Airbnb guests become hosts
Four Types of Network Effects
Indirect
Value increases due to complementary products or services
iPhone → more apps → more users
Data-driven
More usage improves data, which enhances service
Google Search, Netflix recommendations
Direct
Value increases as more users of the same type join
Messaging apps like WhatsApp
Two-sided
Growth on one side boosts value for the other
Uber, Airbnb, marketplaces
The value of a platform increases as more users join
Positive network effects: More users → more value for each user
Negative network effects: Too many users or poor management → reduced value
Manage quality through filters, reputation systems, and governance