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

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.