A Formal Transaction Cost-Based Analysis of the Economic Feasibility of Ecosystems

TL;DR

This paper develops a formal mathematical framework to analyze the economic value and stability of ecosystems using transaction costs economics, providing analytical solutions and conditions for their feasibility and welfare maximization.

Contribution

It extends transaction costs economics with service-dominant logic to formally define and analyze the economic viability of ecosystems, including stability and pricing conditions.

Findings

Derived analytical solutions for hub-and-spoke ecosystems.

Identified conditions for ecosystem stability and feasibility.

Related ecosystem properties to algebraic definitions and existing concepts.

Abstract

Ecosystems enjoy increasing attention due to their flexibility and innovative power. It is well known, however, that this type of network-based economic governance structures occupies a potentially unstable position between the two stable (governance) endpoints, namely the firm (i.e., hierarchical governance) and the (open) market (i.e., coordination through the monetary system). This paper develops a formal (mathematical) theory of the economic value of (generic) ecosystem by extending transaction costs economics using certain elements from service-dominant logic. Within a first-best setting of rational actors, we derive analytical solutions for the hub-and-spoke and generic ecosystem configurations under some uniformity assumptions of ecosystem participants. Additionally, we are able to infer a generic condition for the welfare-maximizing and utility-maximizing price of the hub-and-spoke configuration in the familiar form of Lerner indices and elasticities. Relinquishing a first-best rational actors approach, we additionally derive several general propositions on (i) necessary conditions for the economic feasibility of ecosystem-based transactions, (ii) scaling requirements for ecosystem stability, and (iii) a generic feasibility condition for arbitrary provider-consumer ecosystems. Finally, we present an algebraic definition of business ecosystems and relate it to existing informal definition attempts. Thereby we demonstrate that the property of "being an ecosystem" of a network of transacting actors cannot be decided on structural grounds alone.