Beyond Network Effects: Platform Openness and Herd Adoption

Network effects suggest that platform openness facilitates platform growth by increasing the quantity of complements and then attracting a greater number of users. This widely adopted argument, however, overlooks decision uncertainty and user heterogeneity. In this study, I introduce the theory of herd behavior and examine how platform openness may attract more herd adopters when high uncertainty arises. More specifically, I argue that users who adopt the platform after it becomes open (i.e., post-openness adopters) are more likely to be herd adopters. Compared to those who adopt the platform before it becomes open (i.e., pre-openness adopters), post-openness adopters are more likely to exit the platform after adoption, have less demand for complements, and show a stronger preference for best-selling and traditional complements. In addition, I propose that these differences between pre-openness adopters and post-openness adopters will be exaggerated when the quality variation of newly released complements is high. Using a governance policy change in 2017 on Steam — a dominant online game platform — that suddenly increases the level of openness as a shock, I conduct a before-and-after comparison between new users who adopted Steam in 2016 June – 2017 May and new users who adopted Steam in June 2017 – June 2018. My findings strongly support my predictions. My arguments and findings provide novel insights on how platform openness triggers herd adoption and changes user composition, which complement and contribute to the platform governance literature that has focused mainly on network effects and supply-side outcomes of platform openness.