Classroom Companion: Business

10.2.5 
 Market Regulations
The mere existence of two or more user groups and sometimes also strong network 
effects both within the same user group and between the various groups make it 
difficult to find one regulatory regime that supports fair competition and avoids 
formation of monopolies. Facebook is a de facto monopoly in the segment of 
social media services but not in the advertisement segment. Moreover, intricate 
competition and complex ecosystem make it even harder to regulate MSP busi-
nesses. The complexity itself may make it difficult to identify what needs to be 
regulated, what can in fact be regulated, what are the actual effects of regulation, 
and how can lock-in be avoided.
10.3 
 Network Effects and MSPs
Network effects (see 
7
Chap. 
9
 for a general discussion of network effects) play an 
essential role in MSPs as illustrated in 
.
Fig. 
10.1
 for a two-sided platform. Here, 
there are two distinct user groups. The platform mediates between these two user 
10.3 · Network Effects and MSPs

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10
groups as well as between users within each user group. If the network effect 
involves only one side, it is called a same-side network effect. If it has an impact on 
the other side, it is called a cross-side network effect. Positive, negative, direct, and 
indirect network effects may be present within user groups and between user 
groups. The dynamics of an MSP may be complex since there are dependencies 
and network effects within user groups and between user groups.
It is worthwhile to repeat that network effects are positive feedbacks from the 
market and that the mere nature of positive feedback is such that the market can-
not be in equilibrium unless the market is saturated (there are no more potential 
customers). Therefore, equilibrium theory is not applicable to markets where net-
work effects are present.
The Bass equation (see 
7
Chap. 
18
) is an example of how the market evolves if 
there are same-side network effects present. The outcome a simple cross-side net-
work effect has on the temporal market evolution is analyzed in 
7
Box 
10.1
 using 
a simple mathematical model.