The Achilles heel of interconnected user networks: Network firms and the vulnerability of rapid decline

Digital technologies have amplified firms' ability to gain and sustain competitive advantages by leveraging network effects and large user bases. They allow cheaper and better building, scaling, and operation of user networks, more efficient data collection, lower transaction costs, and ever-stronger scale advantages. Yet, the seemingly stable competitive advantage of large-scale user networks may have an Achilles heel that creates a strategic vulnerability. We examine this overlooked effect by studying how structural network characteristics affect the risk of rapid decline after users start to depart. We find that for user networks with small-world and scale-free properties, the departure of a few influential users can prompt strong negative network effects and accelerate the speed of a decline. To arrive at these insights, we use an analytical approach inspired by the computational networks literature to assess the impact of different structural characteristics on the likelihood of rapid collapse. Our research enriches the platform and network literature by providing fresh insights into the vulnerabilities of interconnected user networks, highlighting the risk of rapid decline. We also suggest practical implications for firms that depend on such networks for a competitive edge.

Automated summary

Digital technologies have enhanced firms' ability to gain and maintain competitive advantages through network effects and large user bases. However, the seemingly stable advantage of large-scale user networks can quickly decline if influential users depart, especially for networks with small-world and scale-free properties. Through an analytical approach inspired by computational networks literature, we examine the impact of different network characteristics on the risk of rapid collapse and provide insights into the vulnerabilities of interconnected user networks.