From Critical Mass to Key Players: A Network Approach to Platform Design

Abstract

In this essay, I generalize the structure of network effect from a ""two-sided market"" to a pair-wised system. By adapting the adjacency matrix from the graph theory and the micro-foundation contributed from Ballerster et al. (2006), I discuss the monetization strategy for the platform that confronts the demand with pair-wised network effects, such as Facebook. I aim to compare the business and welfare implications by pricing users directly and by pricing the third party (e.g. advertisers). I also aim to provide the first tractable competition model when consumers choose how much (time) to consume in each platform, instead of which ""one"" to consume, as this ""multi-homing"" behavior is common in the digitized world.