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Network Effects and Valuation

Falkner, Carl Fredrik LU and Munck af Rosenschöld, Oskar LU (2021) IBUH19 20211
Department of Business Administration
Abstract
This study examines the association between revenue and user base for companies who operate a platform-mediated business model and benefit from network effects. More specifically, the study incorporates both an exponential and linear function in order to see which one most accurately explains the association. Previous research has theorized the notion of an exponential association between revenue and user base, as the number of connections increases at an exponential rate when a new user joins a platform. Furthermore, as previous research points toward a different return on invested capital across industries, an industry variable will be incorporated. Therefore, the study aims to investigate the theoretical aspects of network effects and... (More)
This study examines the association between revenue and user base for companies who operate a platform-mediated business model and benefit from network effects. More specifically, the study incorporates both an exponential and linear function in order to see which one most accurately explains the association. Previous research has theorized the notion of an exponential association between revenue and user base, as the number of connections increases at an exponential rate when a new user joins a platform. Furthermore, as previous research points toward a different return on invested capital across industries, an industry variable will be incorporated. Therefore, the study aims to investigate the theoretical aspects of network effects and Metcalfe, Reed and Odlyzko’s law in order to see how these theoretical viewpoints creates the notion of an exponential association between revenue and user base. Moreover, the study aims to test the association across different industries.

By incorporating data on 85 companies into both a linear and exponential regression, two findings have been observed. Firstly, the dataset cannot determine whether an exponential relationship more accurately explains the association between revenue and user base compared to a linear one. This finding therefore states the contrary to existing literature as an exponential association cannot be determined. Secondly, industry does play an important role when studying the association between revenue and user base. This finding shows that some industries are more efficient at extrapolating revenue from its user base. (Less)
Please use this url to cite or link to this publication:
author
Falkner, Carl Fredrik LU and Munck af Rosenschöld, Oskar LU
supervisor
organization
course
IBUH19 20211
year
type
M2 - Bachelor Degree
subject
keywords
Metcalfe’s law, network effects, valuation, platform-mediated business model, shareholder value approach, increasing returns, standards
language
English
id
9050810
date added to LUP
2021-06-24 14:49:42
date last changed
2021-06-24 14:49:42
@misc{9050810,
  abstract     = {{This study examines the association between revenue and user base for companies who operate a platform-mediated business model and benefit from network effects. More specifically, the study incorporates both an exponential and linear function in order to see which one most accurately explains the association. Previous research has theorized the notion of an exponential association between revenue and user base, as the number of connections increases at an exponential rate when a new user joins a platform. Furthermore, as previous research points toward a different return on invested capital across industries, an industry variable will be incorporated. Therefore, the study aims to investigate the theoretical aspects of network effects and Metcalfe, Reed and Odlyzko’s law in order to see how these theoretical viewpoints creates the notion of an exponential association between revenue and user base. Moreover, the study aims to test the association across different industries. 

By incorporating data on 85 companies into both a linear and exponential regression, two findings have been observed. Firstly, the dataset cannot determine whether an exponential relationship more accurately explains the association between revenue and user base compared to a linear one. This finding therefore states the contrary to existing literature as an exponential association cannot be determined. Secondly, industry does play an important role when studying the association between revenue and user base. This finding shows that some industries are more efficient at extrapolating revenue from its user base.}},
  author       = {{Falkner, Carl Fredrik and Munck af Rosenschöld, Oskar}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Network Effects and Valuation}},
  year         = {{2021}},
}