How network effects can be overcome
Network effects are powerful in business, that’s established and we’re reaching a point where business is seeking them out to consolidate. Something like half of a recent round of Ycombinator startups were targeting network effects.
Cryptocurrency exchanges are popping up now and there’s something interesting about them. Arbitrage exists between them and that surpasses network effects. Imagine a new exchange (EX1) popped up and it had only one trade in its order book: someone offered to buy 100 ETC for $40,000. If the price of ETC drops though, there will be an arbitrage opportunity between EX1 and the other exchanges. Someone out there will create an account, buy that ETC, and go on their way. Ignoring minor friction in liquidity, you can buy and sell your coins anywhere and, subtracting that friction and minor arbitrageur profits, you will get a fair price.
Why is this? Because the coins follow consistent protocols and are interchangeable between those protocols.
So now if there are two companies competing for a certain network, can a third small company find a way to compete? Can arbitrage exist between the two networks?
If you find products sold on Aliexpress and Amazon for different prices, you can take advantage of arbitrage, this already happens. Drop shippers take it further by creating their own smaller stores and transferring between the main exchanges (being Amazon and Aliexpress). Others can also dropship from Aliexpress and Amazon to more niche stores on Etsy or their own sites using Shopify. This isn’t always just wholesaling, I mean a two-way transfer of goods as well when possible.
If there were two dog-walker-finding app companies taking over the market, then can a third company compete? Can they establish a set of protocols that will tokenize and standardize both dog-walkers and customers to make their interactions interchangeable between the two app platforms? I think so. It would require standardizing a form of everything that a dog-walking app does.
Here are some examples if we break the entire app down to 1) a method of finding quality dog walkers through trust, 2) communicating with them, and 3) paying them for their service.
1) Rating dog walkers — this can be done on other platforms and aggregated. Soon we will probably have a company whose entire service is just an API for a five-star rating system, if we don’t have that already.
2) Communication — with proper APIs, communication between customers and service providers can go back and forth from one app to another. See chatbots for example.
3) Exchanging money — this is already done through third-party APIs: through Stripe, using cash, using Venmo, using eTransfers. Platforms nowadays don’t handle money themselves.
So if you use the APIs of competing networks, you can establish a layer of communication between them, and exploit arbitrage opportunities between them. This way the network effect can be broken. Of course there would still be network effects, but we can force them to stay in line. If one company refused to share their APIs or refused to create quality APIs then another company would take its place. If one company’s platform started charging too much then another would offer the same product with a smaller fee. If one company’s UI was too complicated then another company can either create a custom UI using the first company’s API, or create their own platform altogether. As long as arbitrage opportunities exist between two networks then we can possibly keep companies in line.
This applies to dating apps, service-finding apps, ecommerce, cryptocurrency exchanges, plenty of services. As long as companies have quality APIs, we can abstract their services, and communicate the same services, between two different platforms.
