Network Effects in online consumer-to-consumer platforms


This paper focusses on the evolution and growth of online C2C platforms, where other papers mainly focus on the auction system. To examine the evolution and growth, the paper investigates the cross network effects, which means they look at the effect of more sellers on the growth of consumers and the effect of more customers on the growth of sellers. They use data of Taobao, which is the world’s largest online customer-to-customer platform. Taobao is Chinese-based and part of the Alibaba Group. The platform started in 2003 and by December 2012 they had over 7.1 million sellers and 435 million consumers. The transactions made in 2012 totaled 95 bilion dollars.

Taobao started in 2003 with different rules and conditions. After a few months they changed to free pricing and other measures to encourage growth of sellers and buyers. The research uses all the available data that Taobao saved from 2003-2012. This consists of data like what people buy, what product category and what is searched for. The findings imply that the earlier mentioned enhancements accelerate the growth. Moreover, they found that the impact of the seller installed base is much larger on the buyer growth, than the buyer installed base is on the seller growth. Which means that buyers probably inform each other about the amount of sellers and products on a platform, while this happens less with sellers.

If managers know what effects are occurring in their seller and buyer base, they can allocate resources more efficiently. The author discusses three factors that managers can focus at. First, during the introduction stage of the platform, buyers and sellers should be incentivised. For example, through referral bonusses like Uber does. This has a large and long-lasting impact on the growth. Second, the product variety has both a direct and an indirect effect. The direct effect is that new buyers will register. Because of this, more new sellers will sign up to the platform, this is the indirect effect. Third, is the effect of buyer quality. This will attract more sellers, which in turn attracts more buyers. So, the main task for managers is to attract more sellers and buyers with a high quality.

The main strength of the paper is that it uses data from Taobao. The platform does not charge any commissions on the subscription of buyers or sellers, or on the transactions. Instead, it earns money through promotional options for sellers. This means the buyers and sellers can sell and buy for free and this effect is not interfered by any commissions of the platform. Besides this, Alibaba Group gave creditcard payments a more reliable image by launching Alipay, which means there are no barriers for buyers. Moreover, Taobao has a big market share so a lot of data is available.

 

Reference:

Junhong, C. & Manchanda, P. (2016) Quantifying Cross and Direct Network Effects in Online consumer-to-Consumer Platforms. Marketing Science, 35(6): 870-893.

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