The Achilles Heel of Interconnected User Networks: Network Firms and the Vulnerability of Rapid Decline
Knudsen & Belik (2023) The Achilles Heel of Interconnected User Networks: Network Firms and the Vulnerability of Rapid Decline, Technological Forecasting and Social Change (Forthcoming)
Why do some user networks collapse in a flash when users (for whatever reasons) start to leave, while other user networks experience a slow and gradual decline? We zoom in on structural network features that might explain this puzzle.
Digital technologies have amplified firms' ability to gain and sustain competitive advantages by leveraging network effects and large user bases. They allow cheaper and better building, scaling, and operation of user networks, more efficient data collection, lower transaction costs, and ever-stronger scale advantages. Yet, the seemingly stable competitive advantage of large-scale user networks may have an “Achilles heel” that creates a strategic vulnerability. We examine this overlooked effect by studying how structural network characteristics affect the risk of rapid decline after users start to depart. We find that for user networks with small-world and scale-free properties, the departure of a few influential users can prompt strong negative network effects and accelerate the speed of a decline. To arrive at these insights, we use an analytical approach inspired by the computational networks literature to assess the impact of different structural characteristics on the likelihood of rapid collapse. Our research enriches the platform and network literature by providing fresh insights into the vulnerabilities of interconnected user networks, highlighting the risk of rapid decline. We also suggest practical implications for firms that depend on such networks for a competitive edge.