Platform Ecosystems: How Network Business Models Invert the Firm
(Marshall Van Alstyne)
Abstract: In the current economic climate, giant firms like Apple, Alibaba, Amazon, Google, Facebook, and Uber are inevitable. Monopolistic competition in the Internet era resembles the monopolistic competition of the industrial era but for the opposite reason. At the turn of the previous century, supply economies of scale allowed firms producing steel, oil, autos, and rail transport to drive out competition. By increasing volume, they could lower prices, which increased their volume and lowered prices. In the current century, firms providing operating systems, search, social networks, and matching markets are also driving out competition but using the other side of the profit equation. Now firms use demand economies of scale, also called “network effects.” By increasing volume, firms can increase value, which increases volume, which increases value. Network effects, however, scale more readily outside the firm than inside the firm. This inverts the functions of the firm, moving value creation from inside to outside. A shift in the source of value drives changes in marketing, human resource management, operations, and strategy. Emergence of monopolistic competition also drives changes in regulation and policy.