Platform Strategy: How PayPal Solved the Chicken$-$or$-$Egg Problem

This activity is important because the industry life cycle helps determine decisions and options for a firm.

The goal of this exercise is to apply industry life cycle principles to a business case.

Read the following MiniCase and answer the questions that follow.

Long before Venmo and Apple Pay, PayPal disrupted the stodgy banking system by developing a seamless online payment system that allowed anyone with a credit card to use their e$-$mail address to exchange money. A first mover in the peer$-$to$-$peer payments space, PayPal remains a leader, with some $500$ million active customer accounts and a growing number of transactions per account. With many people homebound, its users roughly doubled during the Covid$19$ pandemic. PayPal is available in $200$ countries$/$regions and supports $25$ currencies. Users can send and receive payments quickly over international borders without worrying about filling out endless banking forms, paying an exorbitant wire fee, or dealing with language barriers.

One of the biggest impediments PayPal had to overcome when launching its digital payments platform was the infamous chicken$-$or$-$egg problem. Generating network effects is critical to the success of any two$-$sided platform. Network effects refer to the positive impact that one user of a product or service has on the value of that product or service for other users. In the business world, positive network effects are captured by the metaphor of the flywheel, where small initial wins build on each other, often in an exponential fashion, gaining so much momentum that they drive further growth almost effortlessly. When network effects are present, the product or service's value increases with the number of users. When more sellers use PayPal, more buyers will want to use it $($and vice versa$).$

Positive network effects are attractive and relatively easy to comprehend. However, initiating network effects is super hard. The chicken$-$or$-$egg problem is especially pronounced when it comes to new payment systems. Without sellers of products and services willing to accept the new form of payment, buyers won't use the new service. At the same time, buyers have no incentive to sign up for the new digital payment service if sellers won't invest the necessary time and resources to join the platform. This situation results in the thorny issue of how to successfully launch a new payments platform when you have no starting base and each side is dependent on the other to join.