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Value Creation in IT Service Platforms through Two-Sided Network Effects

Author

Listed:
  • Netsanet Haile

    () (Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University)

  • Jorn Altmann

    () (Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University)

Abstract

IT service businesses can achieve economies of scale and scope faster than in traditional product businesses. In particular, as IT service platforms will become the founding infrastructure of our economies, the analysis and understanding of the value that a service platform can generate is of great importance. IT service platforms provide all involved market participants with different values. For this paper, we consider application service users, service developers and service platform providers as market participants and analyze the interrelationship between the value creations of these market participants. The basis for the description of the values and their interrelationship is the identification of parameters. Based on these parameters, a simulation model has been developed. It helps inferring the relative impact of these parameters on the evolution of the IT service platform stakeholder values. The results imply that there is a two-sided network effect. All stakeholders of a service platform mainly benefit from a growing installed base of application users. The benefit of a large service variety, however, mainly benefits the service platform provider. Therefore, we can state that a large fraction of the value from two-sided network effects goes to the platform provider.

Suggested Citation

  • Netsanet Haile & Jorn Altmann, 2012. "Value Creation in IT Service Platforms through Two-Sided Network Effects," TEMEP Discussion Papers 201297, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Nov 2012.
  • Handle: RePEc:snv:dp2009:201297
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    File URL: ftp://147.46.237.98/DP-97.pdf
    File Function: First version, November 2012
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    References listed on IDEAS

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    1. Joseph Farrell & Garth Saloner, 1988. "Coordination through Committees and Markets," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 235-252, Summer.
    2. Kibae Kim & Jorn Altmann & Junseok Hwang, 2010. "Measuring and Analyzing the Openness of the Web2.0 Service Network for Improving the Innovation Capacity of the Web2.0 System through Collective Intelligence," TEMEP Discussion Papers 201057, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Mar 2010.
    3. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    4. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
    5. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    6. Kibae Kim & Jorn Altmann & Junseok Hwang, 2010. "An Analysis of the Openness of the Web2.0 Service Network Based on Two Sets of Indices for Measuring the Impact of Service Ownership," TEMEP Discussion Papers 201067, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Oct 2010.
    7. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-19, September.
    8. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    9. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
    10. Selam Abrham Gebregiorgis & Jorn Altmann, 2012. "IT Service Platforms: Their Value Creation Model and the Impact of their Level of Openness on their Adoption," TEMEP Discussion Papers 201295, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Jun 2012.
    11. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
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    Citations

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    Cited by:

    1. Netsanet Haile & Jörn Altmann, 2016. "Structural analysis of value creation in software service platforms," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(2), pages 129-142, May.
    2. Kibae Kim & Songhee Kang & Jorn Altmann, 2014. "Cloud Goliath Versus a Federation of Cloud Davids: Survey of Economic Theories on Cloud Federation," TEMEP Discussion Papers 2014117, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Jul 2014.
    3. Netsanet Haile & Jorn Altmann, 2013. "Estimating the Value Obtained from Using a Software Service Platform," TEMEP Discussion Papers 2013105, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Aug 2013.
    4. Netsanet Haile & Jorn Altmann, 2015. "Value Creation in Software Service Platforms," TEMEP Discussion Papers 2015123, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Sep 2015.

    More about this item

    Keywords

    IT Service Platform; Value Creation; System Dynamics; Two-Sided Network Effect; Business Modeling; IT Business; SaaS; Cloud Computing.;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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