Treading a Tightrope: Political Externalities and Platform Strategy

Abstract: A platform's success depends crucially on generating and growing positive network externalities among its various user sides. However, actions undertaken by the platform to generate and manage positive network externalities simultaneously generate political externalities, as platform users are also political agents, and constituents of states. We explain how these political externalities are caused by platform actions and examine their impact at two levels: individuals i.e., platform users and other state constituents, and states. We analyze the interplay of positive network externalities and (negative) political externalities for the platform as it potentially changes user membership and participation on the platform, and triggers changes in the platform's non-market environment as a result of interventions by states. Finally, we draw implications for platform strategy and policy.