Network Effects (Indirect) - Sebastián

In network economies, the concept of "network effects" captures the simple notion that "bigger is better". The more users connected to a network, the more value that network will have for those users (and, consequently, the more value the network operator will be able to extract from said users). However, the value of networks does not rely solely on user growth. It may also derive from complementary products and services whose usefulness both depends on the network and reinforce its value. These are known as "indirect network effects".

Indirect network effects are a defining feature of two-sided and multi-sided markets. Food-delivery platforms (such as Uber Eats) work this way, connecting restaurants with end consumers. A large consumer base can be leveraged by the platform operator to attract not only more restaurants, which widens the choice on offer, but also more drivers, which shortens delivery times. In this way, the platform's value is built not just on user growth, but on the value that one side of the market places on the other.

However, multi-sided markets allow platforms to exercise power against one side while attempting to attract the other. In the case of Uber Eats, special offers are granted to consumers in order to attract them and prevent app-switching, effectively retaining them; on the flip side, both restaurants and drivers are met with abusive conditions that they must accept in order to access this wider net of consumers. That way, while acting as a standard market player for consumers, Uber Eats exercises monopoly power on the supplier side.

Moreover, Uber Eats can leverage its scale to subsidize demand, offering discounts through subscription programs such as Uber One, which encourages single-homing from the consumer's side. Such aggressive subsidization may deter rivals from challenging the incumbent. Furthermore, where competitors have sought to enter through differentiation, the incumbent has been able to absorb them. One key example is Cornershop, a Chilean start-up offering large-scale grocery delivery. Uber acquired the company in 2021, and by 2023 had fully integrated the service into Uber Eats and erased the original brand, which can be read as eliminating a potential competitor before it could expand to its core business.

One aspect that I believe has stayed on the margins of this concept is the notion of data-driven network effects. Platforms can leverage data accumulation for secundary purposes, which is closely linked with the notion of indirect effects, since the value of the network does not simply stem from its size. However, it does not entirely fit with the traditional concept of "indirect network effects" either, since in many cases data is used to boost services that are unrelated to the core services of the platform (i.e. a social media platform using users' data to train AI models that will not necessarily be deployed in the platform itself). With this in mind, it is worth questioning whether this phenomenon can be studied as part of the literature of network effects or if it should remain as a separate policy issue.