Classroom Companion: Business

NY Times
Ebay
Kickstarter
Facebook
. Fig. 8.4 Examples of value networks. (Authors’ own figure)
8.4 · Value Network

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8
Customers or users may be people or organizations. The users may be of the 
same category; for example, friends on Facebook. The users may also be of differ-
ent categories; for example, a newspaper is mediating between readers and adver-
tisers. The latter is an example of a multisided platform with strong cross-side 
network effects (see 
7
Chap. 
10
). The same applies to commercial television and 
social network services such as Facebook and Twitter. Their revenue from adver-
tisements is directly related to the number of people using their services.
As just explained, the competitive strength of several value networks depends 
not only on the quality of the product they deliver but also on the number of users 
they have been able to capture and, in particular, how these users stimulate other 
people to become members of the network. These are the network effects discussed 
in 
7
Chap. 
9
. The awareness and popularity of a product is sometimes related to 
the diffusion of information of the product via channels other than advertisement 
such as word-of-mouth. The “like” button on Facebook and other social media is 
another mechanism for increasing the recognition of a product.
Many of the largest companies in the digital economy base their businesses on 
the value network. Examples of value network companies among the top five com-
panies in the world according to market cap include Facebook, Amazon, and 
Google. One of the most important reasons why these value networks tend to get 
so big is just the network effects.
Networks often produce goods that are not stored but consumed immediately. 
For instance, it is not possible to store the following for later use: empty seats in 
aircraft or trains, surplus energy, unused bits on the Internet, or empty space in the 
cargo hold of a truck.
Value networks may offer mutual benefits to its members. This is the idea 
behind clubs of different kinds (e.g., literary, musical, bonus programs, sports)—
the more members, the bigger the benefit. The insurance company can offer better 
security at a lower price if many people are using the same insurance company. One 
reason why they may lower the price is that the more customers of the same type 
they have, the smaller the uncertainty (or variance) of the stochastic product they 
are selling (this is called the law of large numbers in statistics).
The cost of one item of a service in a value network can be expressed as follows:
c
m
A
n
=
+
Here, m is the direct cost (marginal cost) per item, A are the common costs associ-
ated with a product, and n is the number of items produced. How to measure or 
compute these three variables is discussed next.