M1 Diffuse innovation vs dominant platform

Topic

Information and knowledge can be organized in two distinct ways around the near-zero marginal cost and network effects that define the "track": either as a regime of diffuse, open innovation involving many players, or as a regime concentrated around a dominant platform that captures nearly the entire market—a "winner-take-all" scenario. The variable that triggers the shift from one regime to the other is the intensity of network effects relative to the switching costs a user faces when moving between platforms: when switching costs are high compared to network effects, changing platforms remains viable and innovation stays distributed among various actors; when network effects outweigh switching costs, changing platforms ceases to be a realistic option for the user, and the track shifts toward concentration around a dominant platform.

This second regime is the environment where an extreme platform monopoly can emerge: the digital market concentration that marks the transition to a dominant platform is the same variable that, upon crossing the threshold of effective monopoly, signals that this anomaly has materialized. Not every dominant-platform regime reaches this extreme—concentration can remain below the effective monopoly threshold for some time—but it is within this regime, rather than the diffuse innovation regime, that the conditions for such an anomaly to develop are found.

The diffuse innovation regime, by contrast, is the one that keeps the door open for sudden, disruptive obsolescence: with many competing players and no network effect strong enough to lock users into a single platform, a substitute technology capable of reaching its own adoption tipping point is more likely to emerge. When this occurs within a dominant platform regime, however, the substitute technology first faces the barrier of the already high switching costs that sustain the dominant platform, and it only succeeds in displacing it if its own network effects manage to overcome that barrier. The regime in which the track finds itself at any given moment thus determines whether the next anomaly it faces is more likely to be extreme platform monopoly or sudden disruptive obsolescence.

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