Quantifying Cross and Direct Network Effects in Online C2C Platforms

Marketing Science, Forthcoming

Ross School of Business Paper No. 1248

48 Pages Posted: 13 Sep 2014 Last revised: 8 Dec 2015

See all articles by Junhong Chu

Junhong Chu

NUS Business School

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business

Date Written: November 1, 2015

Abstract

Consumer-to-Consumer (C2C) platforms have become a major engine of growth in Internet commerce. This is especially true in countries such as China, which are experiencing a big rush towards electronic commerce. The emergence of such platforms gives researchers the unique opportunity to investigate the evolution of such platforms by focusing on the growth of both buyers and sellers. In this research, we build a utility-based model to quantify both cross and direct network effects on Alibaba Group’s Taobao.com, the world’s largest online C2C platform (based in China). Specifically, we investigate the relative contributions of different factors that affect the growth of buyers and sellers on the platform. Our results suggest that the direct network effects do not play a big role in the platform’s growth (we detect a small positive direct network effect on buyer growth and no direct network effect on seller growth). More importantly, we find a significant, large and positive cross-network effect on both sides of the platform. In other words, the installed base of either side of the platform has propelled the growth of the other side (and thus the overall growth). Interestingly, this cross-network effect is asymmetric with the installed base of sellers having a much larger effect on the growth of buyers than vice versa. The growth in the number of buyers is driven primarily by the seller’s installed base and product variety with increasing importance of product variety. The growth in the number of sellers is driven by buyer’s installed base, buyer quality, and product price with increasing importance of buyer quality. We also investigate the nature of these cross-network effects over time. We find that the cross-network effect of sellers on buyers increases and then decreases to reach a stable level. In contrast, the cross-network effect of buyers on sellers is relatively stable. We discuss the policy implications of these findings for C2C platforms in general and Taobao in particular.

Keywords: Platforms, Two-sided markets, Cross-network effect, Direct network effect, E-commerce, Emerging markets, China

JEL Classification: L00, M31, C30, C51

Suggested Citation

Chu, Junhong and Manchanda, Puneet, Quantifying Cross and Direct Network Effects in Online C2C Platforms (November 1, 2015). Marketing Science, Forthcoming, Ross School of Business Paper No. 1248, Available at SSRN: https://ssrn.com/abstract=2494948 or http://dx.doi.org/10.2139/ssrn.2494948

Junhong Chu

NUS Business School ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore
65-65166938 (Phone)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/157-junhong

Puneet Manchanda (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-936-2445 (Phone)
734-936-8716 (Fax)

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