The Effects Network Externalities on Platform Value and Management: Evidence from Internet Poker Users

Abstract

This study tests network theory using data from internet poker users, a platform-based business. The study demonstrates the existence of network effects but also limits to scale. The composition of user types on the network is found to significantly affect value, and that value varies by user type. Users with value-appropriating capabilities are shown to extract higher returns from the network. The findings suggest that platform-based businesses need to manage both the size of their network and the relative composition of users. They must also consider the external effects, both positive and negative, users from different groups impose on the value others receive from networks. These findings contribute to a limited body of empirical evidence evaluating theory associated with business strategies in platform-based businesses.

Keywords: network effects; platform businesses; value-appropriating capabilities; opportunistic behavior

JEL Classification: D85; L83