Impact of network effects on service provider performance in digital business platforms

Abstract

PurposeDigital business platforms (DBPs) such as Alibaba and Google Shopping are partnership networks that use the Internet to bring service providers (e.g. retail vendors) and customers together. One of the benefits of DBPs is network effects, in which customers can purchase from multiple providers, giving rise to a unique network. However, few studies have explored which service providers benefit from network effects and which do not.Design/methodology/approachUsing the theories of transaction costs and network analysis, the authors apply network models to DBPs to understand which service providers benefit from network effects.FindingsThe authors identify three segments of service providers: (1) those with high prominence (connection to providers with high network centrality), (2) those with high network constraint (adjacent to isolated providers) and (3) those with low prominence and constraint. The authors find that segments (1) and (3) benefit from reciprocated customer exchanges, and thus benefit from network effects, while high constraint segment (2) providers do not benefit from reciprocated exchanges. Moreover, the authors find that for segments (2) and (3) future sales have a negative association with unreciprocated customer exchanges, while segment (1) has no significant association between unreciprocated exchanges and future sales.Research limitations/implicationsThe authors discuss implications for a multisided platform (MSP), as it decides which service providers to attract, promote and recommend. They can use this study’s results to know which segments of providers will increase network effects to make the platform more valuable.Practical implicationsThis paper provides managers of service platforms with strategies for managing relations with their service providers.Social implicationsService platforms are an important and disruptive business model. The authors need to understand how network effects operate to create efficient platforms.Originality/valueThis paper extends the literature on MSPs by quantifying network effects and showing not all service providers benefit equally on an MSP from network effects. Critical insights into network effects on the MSP are provided, including different ways it can impact provider sales.