Academic journal article Seoul Journal of Economics

Competition in Two-Sided Platform Markets with Direct Network Effect

Academic journal article Seoul Journal of Economics

Competition in Two-Sided Platform Markets with Direct Network Effect

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

A. Motivation

The greatest revolution triggered by the widespread use of smartphones is that "sharing," "recommending," and "doing activities with friends" have become extremely easy via social networking services (SNS). This "sharing" function allows individuals to appreciate, work on, and evaluate their content with others by simply clicking a "share" button. This convenient function is rapidly transforming conventional content and industries. This trend is mostly aimed to generate direct network externalities.

A real-life transition resulting from the widespread use of smartphones is demonstrated in the way people play games. Before the mobile era, games were frequently played by only one player or with a few others. However, mobile games based on SNS platforms allow users to enjoy the games with their friends or acquaintances whose contacts are in their mobile phones. Players are no longer limited by time and space because they can play a game with anyone at any time through the SNS platforms that the game is based on. For example, Facebook, the social network giant with 1.3 billion users, provides a game platform in which users can complete missions and compare scores with their Facebook friends. Line and Kakao, which are mobile messenger apps with 600 million and 140 million users, respectively, also provide platforms for mobile games. Users can now enjoy playing games with friends on their list and even receive invitations from their friends to keep on playing. Thus, users invite more friends to play games, which significantly contributes to the rapid popularization of mobile games.

Another influence of the "sharing" function is demonstrated in the change in the consumption patterns of printed content, such as newspaper and books. Social networks, such as Facebook and Twitter, show articles that the friends of their users have read, recommend topics that users may be interested in based on the articles that their friends are reading, and display these articles on the top of their list. Amazon provides a review service to buyers. Buyers are encouraged to recommend good books and leave reviews for those books, which urge users to purchase books frequently. All these functions are intended to generate direct network effect.

The increasing use of content recommendation services based on the consumption pattern of users' friends has become notable in ecommerce. The movie review website "Watcha" distinguishes itself from other movie review websites by offering a sharing function. Users share their reviews with their Facebook friends, and this practice encourages users to share their movie experiences. Airbnb, the largest website in the world for people who rent out accommodations, provides a sharing function through Facebook or Google accounts. Users can share information about the accommodation facilities where they have stayed to help their friends or acquaintances find good accommodations. This website also provides a "review" from other users, which can generate accurate information as the number of users increases. Thus, these trends of "sharing" or "recommending" allow the identification of "good" products or contents, thereby leading to their frequent consumption. These trends are certainly driven by the widespread use of smartphones. If web-centric software platforms were "likely to produce changes that dwarf the revolution we have seen in the last quarter century (Evans, Hagiu, and Schmalensee (2006))", then this phrase definitely applies to "smartphone-centric" platforms at present.

Services that prompt users to frequently "share," "recommend," "invite," or "do activities" with friends or other users have a two-sided structure. For example, social networks, such as Facebook, Line, and Kakao, provide platforms where users can access, download, and play games with friends (or other users of that service). The games provided through these websites are originally produced by mobile game developers. …

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