CAPITAL CONCENTRATION: DIGITAL-NETWORK DIMENSION

Abstract

The basis of network businesses is the use of network effects, and more precisely: the possibility of network effects monetization determines the revenues of the owners of such networks (platforms), while the insignificant impact of the growth of networks on the costs of platforms (in particular, in the calculation per one transaction) contributes to the growth of their profitability. Therefore, it is fair to assume that the concentration of control over networks leads to an increase in the competitive advantages of the relevant market participants, which in turn contributes to the concentration of capital and a decrease in compe­titiveness. To test this assumption, the study summarizes and analyses the key features of network businesses (in comparison with other industries inter alia) and the realization of network effects, which lead to the concentration of capital and the strengthening of the influence of large actors. The first part of the article examines the mechanism of manifestation of the unique characteristics of network business in the context of capital concentration, in particular, stimulation of organic and inorganic development, availability of financing and control over data. The mechanism of influence of each of these factors on the concentration of capital is determined from the point of view of both promoting the capitalization of individual platforms and limiting the actions of competitors, thus emphasizing the favourable influence of such factors for large actors who gain an advantage by using network effects for capital concentration. In the second part, a generalized model of the interaction of network effects and capital concentration is proposed, when  the impact of the network effects of the existing platform contributes to its organic growth, which allows further development through inorganic growth to expand the functionality and / or increase the number of users, which in turn starts a new stage of organic growth; each of these growth cycles results in an increase in the capitaliza­tion of the platform, and therefore the concentration of capital in the corresponding market segment. Thus, the general tendency to reduce competitiveness in platform businesses due to the interaction of network effects and capital concentration is explained. Finally, in the third part, the main approaches to the assessment of network effects are considered, with the provision of typical models used in the practice of capital concentration in platform businesses through mergers and acquisitions or gaining access to the stock market.