Reflective Report No. 2

During the third week, we delved into the concept of digital platforms, which are internet-based services that facilitate interactions between diverse user groups, including individuals and businesses. These platforms create a virtual space where users can engage in transactions that would be impractical to pursue individually.

Our class discussions also provided valuable insights into the economic characteristics of digital platforms. First, the "long-tail effect," which is driven by digital platforms such as online marketplaces, enables businesses to offer niche and less popular products to a larger consumer base. Digital platforms, as opposed to conventional stores with limited space, can attract smaller and more specialised customer bases and enable them to discover and purchase products that align with their unique tastes.

For instance, popular music streaming services like Spotify have a huge collection of songs, including ones that aren't as well-known. While these less popular songs might not have substantial individual plays, their collective appeal to users with diverse musical preferences constitutes a significant audience. So, the long-tail effect of digital platforms allows companies to offer customers a wide range of choices, even if they are not the most popular. This mutually beneficial scenario accommodates both customers looking for distinctive items and businesses attempting to meet their specific preferences.

Source: Spotify

Additionally, I gained an understanding of network effects and their role in enhancing user value and influencing business success. The value of products, services, or platforms increases as more participants engage within the network. Key examples include social media and communication platforms like Facebook and WhatsApp, where the more users join, the more content, connections, and interactions there are.

There are several distinct forms of network effects:

• Direct network effects: Occur when a product's value increases because more consumers of the same variety join a network. For example, on social media platforms, a rise in consumers results in a rise in interactions and connections.

• Indirect network effects: Arise when the value of a product for one user group increases as more users from another user group join the network. For example, credit card networks thrive as the number of cardholders rises and merchants increase.

• Positive network effects: A product becomes more valuable as its usage expands. Online marketplaces exemplify this, as a growing number of buyers attracts more sellers, resulting in a larger variety of products.

• Negative network effects: Occur when the value of a product experiences a decline as the number of users in the network increases. This situation may happen due to, firstly, network congestion, which occurs when demand exceeds the available supply. An example of this is when there are an excessive number of online orders during a sale or promotional event. Secondly, network pollution, which entails unwanted or data traffic within a computer network, has the potential to disrupt regular operations and compromise network security, such as spam emails.

Click to read about Online Shopping Vs. Network Effect

"In digital economies, sustainable success comes from not just improving products, services, and user experiences but from improving customers, clients, channels, and suppliers as well." 

- Michael Schrage, a Research Fellow at the MIT Initiative -