Failure to Launch: Critical Mass in Platform Businesses

33 Pages Posted: 10 Apr 2009 Last revised: 5 Sep 2010

David S. Evans

Global Economics Group; University College London

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 2, 2010

Abstract

Platform businesses add value by facilitating interactions between customers who are attracted at least in part by network externalities. Platform businesses with low switching costs have become more important with the rise of the internet. This essay explores the sources of the initial critical mass constraint that new, potentially viable businesses of this sort generally seem to face. For two-sided platforms, we show that this constraint is two-dimensional and depends on the nature of network effects and the distribution of customer tastes. Depending on the dynamics of adjustment to equilibrium, it may pose a chicken-and-egg problem.

Keywords: Platform businesses, two-sided platforms, critical mass

JEL Classification: L1, O3

Suggested Citation

Evans, David S. and Schmalensee, Richard, Failure to Launch: Critical Mass in Platform Businesses (September 2, 2010). Available at SSRN: https://ssrn.com/abstract=1353502 or http://dx.doi.org/10.2139/ssrn.1353502

David S. Evans (Contact Author)

Global Economics Group ( email )

111 Devonshire St.
Suite 900
Boston, MA 02108
United States

University College London ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-525
Cambridge, MA 02142
United States
617-253-2957 (Phone)
617-258-6617 (Fax)

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