Introduction
The article Are network effects really all about size? The role of structure and conduct by Afuah (2013) presents a comprehensive analysis of the effect of structure and conduct factors on the network’s ability to create value for consumers and providers. The author constructs arguments based on criticism of the size hypothesis and illustrations of how other factors can influence the value of networks. The article offers an extensive theoretical basis for researching network factors, but its practical recommendations do not seem insightful. Thus, this paper is more of an overview, emphasizing the importance of considering many aspects, which can be useful for managers.
Summary
The author of the article primarily introduces concepts of the size of the network and its potential value to consumers and managers. In particular, it is emphasized that there is a widespread belief in the existing literature that the size of the network is the key to making strategic decisions. In particular, this statement suggests that the other components of the net trade are less significant to consider than size. The author argues that the dominance of the concept of network size has its roots in four neoclassical economic assumptions. These assumptions are described in the network effects literature and postulate the effectiveness of expanding the size of the network. This view builds the widespread belief that “value to each network user and provider from network effects increases with the square of network size” (Afuah, 2013, p. 260). Thus, according to the size hypothesis, even a small lead in a product network can experience exponential growth, giving the company a critical competitive advantage. Based on this assumption, managers seek to expand the product network early in its life cycle.
At the same time, it is noted that other researchers emphasize the need for investment in innovation and knowledge. This process can enable a company to create a product with consumer benefits that outweigh the benefits of a competitors’ product network size. Thus, Afuah (2013) partly supports this view, emphasizing the overriding importance of other network characteristics besides size. In particular, it is noted that “two factors influence the value a network member or provider can derive from network effects: network structure…, and network conduct” (Afuah, 2013, p. 258). It is important that the structure of the network is a broader characteristic, which includes, among other factors, its size. Afuah (2013) argues that the value of each member of the network depends on many different aspects. In particular, the author indicates seven key ones: “(a) the feasibility of transactions, (b) the centrality of its members, (c) the structural holes and ties within the network, (d) the number of roles each member can play, as well as by (e) the level of opportunistic behavior, (f) the members’ reputation, and (g) the perceptions of trust.” Ignoring these factors leads managers to the insufficiently beneficial use of the opportunities for competitive advantage that the network can offer.
The author divides the seven critical characteristics of the network into two groups: structure and conduct. The structure includes the number of members of the network, their relationships, and the nature of the interaction (Afuah, 2013). Thus, the size of the network is one of the aspects, but not the dominant one. Transaction feasibility determines how many other network members the consumer can communicate with and also receive value from them. Afuah (2013) argues that there are different types of networks in which not all members can interact with each other. In general, the more network members can communicate with each other, the more value both the customer and the provider receive. This characteristic is one of the main ones from the perspective of the network structure.
Another important factor that determines the structure of the network is its members. According to Afuah (2013), the positions and activities of network members are critical, which determine the amount of value received. Centrality refers to the fact that the amount of benefit obtained depends on the characteristics of the members occupying central positions in the network (transacting with more other members). Structural holes assume that members who establish links between sub-networks receive more value than those who do not. Thus, more active participants in the network are expected to benefit more from participating in it than others. At the same time, these aspects pose a possible threat to the company if the opportunistic member takes a central position. The strategy should be based on preventing the attraction of more opportunistic members, which allows the network to remain stable.
Network ties are another key characteristic of the network, which determines how information is exchanged within it. In particular, weak ties help in locating the exchange, and strong ties help in its conduct. Regardless of the size of the net trade, without such ties, it will not be able to generate enough value for consumers since they will not be able to participate in a quality exchange. Additionally, Afuah (2013) stresses that a smaller network with numerous ties is more valuable to consumers than a larger one with fewer of them. This factor is also related to the characteristics of which swarms are performed by members of the network. According to Afuah (2013), the more critical roles they play, the more value the network has for them. In this case, it is important to take into account the needs of the members of the network, which determines their roles, which are able or not able to satisfy them.
Finally, the last of the significant structural characteristics of the network is the heterogeneity of capabilities, as well as the inverted U-shape of size. Afuah (2013) argues that the more diverse capabilities of the network are capable of satisfying more customer needs, making it more valuable to members. At the same time, when the network offers unique resources and reaches a certain size, adding new members can reduce its value. This effect results in an inverted U-shape where a larger size is associated with a lower value. Thus, Afuah (2013) emphasizes that there are multiple structural aspects of a network other than size that affect its value. Moreover, not all of them have a direct effect on the benefits for consumers and providers.
Factors related to network conduct include three aspects: opportunistic behavior, reputational effects, and the effect of trust. Afuah (2013) argues that opportunistic behavior arises as a result of information asymmetry and significantly reduces the value of the network. Reputational effects refer to the fact that the better reputation of the members has a positive effect on the generation of value depending on the size of the network. Additionally, the higher the trust in the members of the network, the more influence the network has and the faster it grows. These factors generally relate to how honest and open activities are conducted within the network. Afuah (2013) argues that, along with the structure of the network, the conduct of its members has a direct impact on its value. Based on the characteristics described, the author further defines the strategic applications of considering factors beyond the size of the network.
Critique
First of all, it is important to consider the structure of argumentation that the author has chosen to convey the main points. It should be noted that the sequence of presentation of the material in the article is strict and logical. Specifically, the author starts with an introduction to the topic of the network and later provides information on the dominant view of the size of the network as the dominant indicator of value. The key aspect, in this case, is the presentation to the reader of four assumptions, on the basis of which the neoclassical representation argued by Afuah (2013) is built. Further, these assumptions serve as the basis for presenting the author’s counterarguments since he considers these postulates as the basis. In particular, for each of the identified characteristics, the Afuah (2013) network uses the above assumptions and proves their inconsistency or falsehood. The arguments are constructed using the example described in the background information section, which describes a hypothetical company that seeks to gain a competitive advantage through the use of networking.
This section is of particular interest as it introduces important terms and frameworks that are later used in the article. Additionally, it defines what constitutes a competitive advantage and how it depends on the type of network. In this section, the author introduces important concepts to the reader, as well as their interaction with other factors described in the article. In this case, such information serves as a ram for a discussion of the main points. Afuah (2013) identifies that this article is relevant to a company that is “a network member or provider, and whose goal is to have a competitive advantage in the markets in which it competes” (p. 258). Thus, the author unambiguously outlines the framework that is applicable to this study. At the same time, the reader understands that the article seeks to develop guidelines that can be used for management beyond the size hypothesis.
After the background information section, the author explains the origins of the current dominance of network size; then immediately presents a counterargument about the importance of structure and conduct. This sequence allows one to immediately identify the main point of the article, which argues against considering the size of the network as the only valuable characteristic. At the same time, Afuah (2013) presents four assumptions that became the basis for discussion. In this situation, a number of questions arise as to how the future points of the article relate to these assumptions. Thus, the provisions presented define certain conditions that the network meets for the application of the size hypothesis. In particular, all slans can communicate with each other, have resource homogeneity, all members are rational, all members have information about each other and about transactions, and information flows seamlessly (Afuah, 2013). However, later in the article, the author generalizes these postulates by applying them to certain examples with special conditions.
This situation can be illustrated with several examples provided by the author in the arguments. In particular, explaining the transaction feasibility aspect, Afuah (2013) emphasizes that “in fact, Assumption 1 does not hold for many networks, and therefore their structures” (p. 261). Thus, the author himself admits that the model proposed by the neoclassicists is suitable for those networks that meet certain criteria. At the same time, the article discusses other, more special cases when the network differs in its structure from the general rule. Especially noteworthy in this connection is the author’s reasoning about opportunistic behavior. As stated in the postulates, all members of the network must be rational, which contradicts the desire to use its resources for selfish purposes. The exploitation of imperfections in the system, which will inevitably lead to a decrease in value, cannot be rational. Again there is a situation where the assumptions used as the basis for counterarguments are not a contradiction to the main points.
This observation leads to the conclusion that the structure and conduct factors presented by the author describe special cases when the network size is not a key aspect. In this situation, the network has distinctive features that change the conditions under which they can effectively provide value to the consumer. However, the author draws a direct distinction between the need to consider the size and the proposed aspects as a general rule rather than a special case. In the discussion section, Afuah (2013) notes that the aim of the article is to illustrate that “factors beyond network size determine the value of a network to its members and provider(s)” (p. 268). Thus, a clear distinction is made between the neoclassical model and the proposed factors. At the same time, further, the author identifies that such conditions, which are described by the proposed assumptions, are ideal. In other words, it is emphasized that each network has its own unique conditions and characteristics that cannot be described by the general model.
Despite this, the discussion about the factors of structure and conduct themselves does not specify particular conditions that indicate which characteristics are paramount. Afuah (2013) does not provide conditions that ensure the importance of certain factors. In general, the author does not offer a framework within which managers could determine which aspects require attention and are critical. On the other hand, the article provides an overview of the possible reasons for the lack of effectiveness of the network. Afuah (2013) provides strategic applications that are described based on the proposed network factors. These proposals are rather broad in nature, identifying possible strategic directions. For example, in the absence of trust in network members, the author suggests investing in building trust in network members (Afuah, 2013). However, Afuah (2013) does not describe what tools managers can use to achieve the desired effect. Thus, the practical application of the article is rather limited and more theoretical in nature.
In general, the article provides useful information about what characteristics a network can have and what aspects affect its functioning. These factors make the information presented by the author valuable for managers and researchers, as it allows identifying key influences. Moreover, (Afuah, 2013) has done comprehensive research, which includes a large amount of different literature. At the same time, the focus of his research is mainly on the factors of structure and conduct, while the size of the network is revealed superficially. The information would be more complete if the author used its more specific characteristics to criticize the size hypothesis. The four postulates that are taken as the basis of the arguments do not fully reveal the size of the network and its applicability to management.
It is worth noting that providing such detailed information and many examples about the specifics of the structure and conduct of networks is potentially valuable to managers. Using this information, they can consider numerous factors that affect the functioning of the network. While the author does not provide practical recommendations for identifying this or that aspect, their detailed description allows one to draw conclusions about the various conditions that characterize them. From a practical point of view, it can also be useful for developing strategic directions, which are also indicated by the author. Although they do not offer such recommendations, they illustrate implications based on the information provided.
In general, the arguments presented in the article can be used not as a refutation of the dominance of the size hypothesis, but rather as an addition to it. In particular, the author emphasizes that size should not be the only critical network characteristic. At the same time, this important parameter cannot be ignored, since it is also part of the network structure. In this regard, it would be useful in the article to point out how structure and conduct factors interact with the network size effect. The size hypothesis is dominant, so it is difficult to reject it. (Afuah, 2013) it was necessary to discuss how factors of structure and conduct can be complementary to size. In this situation, practical implications were more realistic and useful, because they would fit into the existing framework, rather than suggest a completely new one.
Future directions for research also seem quite controversial, as they offer selective deepening of the topic and branching out other possible combinations. Afuah (2013) states: “I limited exploration of the interaction between structure and conduct constructs to just one: the interaction between opportunism and network ties” (p. 269). In this situation, the researcher rejects other possible interactions, the potential importance of which may be difficult to predict. Thus, a direction for future research towards exploring the interaction of factors of size, structure, and conduct seems more promising. The research proposal of social network theory and its interaction with the market power view is promising and can significantly expand knowledge in the field. In this situation, it is important to assess what social factors are of key importance for the formation of networks in the market and how they can be managed.
Conclusion
The paper argues that the size hypothesis is not the only one necessary to consider in network management. The author provides comprehensive information on other significant factors that can have an impact on the value of the web. However, the article is rather an overview and does not provide significant practical recommendations. At the same time, it can be helpful in understanding how many factors can influence the value of a network. The article offers a new rather than complementary perspective with past research, which can be useful for developing a more in-depth theoretical basis.
Reference
Afuah, A. (2013). Are network effects really all about size? The role of structure and conduct.Strategic Management Journal, 34, 257-273.