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Technology Platforms Will Create Decades of Gales of Creative Destruction

(p. A11) For traditional businesses, economies of scale are the key to competitive advantage: Larger firms have lower average costs. In the digital economy, network effects matter most. In "Matchmakers" (Harvard Business Review, 260 pages, $35), David S. Evans (a consultant) and Richard Schmalensee (a professor of management) highlight two particular forms.

Direct network effects occur when additional users make a service more valuable for everyone. If one's colleagues are all on, say, LinkedIn, it will be hard for another professional network to exert a strong appeal. Without the critical mass of LinkedIn, the alternative will have less utility even if its features are better. Indirect network effects arise from positive feedback loops between opposing sides of a market. The value of Rightmove, for instance, the leading online real-estate site in Britain, comes from a matching function: Since each home is unique, buyers prefer the site with the most properties, and real-estate agents favor the site with the most buyers. This virtuous cycle magnifies Rightmove's advantage even though participants on each side of the market compete with one another: More buyers increase competition for the same homes, and agents compete for buyers.

. . .

"Matchmakers" is . . . measured and analytical . . . . The authors fairly conclude that, while the telegraph was "a far more important multisided platform" than anything produced so far by the Internet, platforms are "behind the gales of creative destruction that . . . will sweep industries for decades to come."

For the full review, see:

JEREMY G. PHILIPS. "Why Facebook's Imitators Failed; If one's coworkers are all on the same platform, any alternative will have less utility--even if its features are better." The Wall Street Journal (Thurs., May 19, 2016): A11.

(Note: the ellipsis between paragraphs, and the first two in the final quoted paragraph, are added; the third ellipsis in the final paragraph is in the original.)

(Note: the online version of the review has the date May 18, 2016.)

The book under review, is:

Evans, David S., and Richard Schmalensee. Matchmakers: The New Economics of Multisided Platforms. Boston: Harvard Business Review Press, 2016.

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