Failure to Launch: Critical Mass in Platform Businesses

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