hostile-takeover

What Is A Hostile Takeover? Hostile Takeover In A Nutshell

Hostile takeovers occur when one company (the “acquirer”) seeks to purchase another company (the “target”) despite opposition to the move from the target’s management. Hostile takeovers differ from friendly takeovers, where both companies work to achieve a mutually beneficial outcome. A hostile takeover, therefore, occurs when one company attempts to seize control of another company despite objections from that company’s management.

AspectExplanation
DefinitionA Hostile Takeover is a corporate acquisition strategy in which an acquiring company, also known as the “acquirer” or “raider,” attempts to purchase a target company’s shares and gain control without the approval or cooperation of the target company’s management and board of directors. Hostile takeovers often involve direct offers to the target company’s shareholders at a premium over the current stock price, aiming to persuade shareholders to sell their shares to the acquirer. These takeovers can be contentious, involving aggressive tactics, proxy battles, and legal maneuvers. The objective is to gain control of the target company’s assets, operations, and decision-making powers. Hostile takeovers can significantly impact the target company’s management, employees, and shareholders.
Key ConceptsAcquirer: The company seeking to acquire the target through a hostile takeover. – Target Company: The company that is the subject of the hostile takeover attempt. – Shareholder Approval: In a hostile takeover, the acquirer does not have the approval of the target company’s management and board of directors. – Premium: The acquirer typically offers a premium over the current stock price to entice shareholders to sell. – Proxy Battles: Proxy contests may occur as both sides seek shareholder votes to support their positions.
CharacteristicsResistance: Hostile takeovers involve resistance from the target company’s management and board. – Public Negotiations: The takeover attempt often becomes a public and media-discussed event. – Shareholder Decision: Ultimately, the target company’s shareholders decide whether to accept the acquirer’s offer. – Legal Complexity: Hostile takeovers can lead to legal battles and regulatory scrutiny. – Change in Control: If successful, a hostile takeover results in a change of control of the target company.
ImplicationsChange in Leadership: Hostile takeovers can result in a change in the target company’s management and board of directors. – Shareholder Outcomes: Shareholders may benefit from a premium on their shares if they accept the acquirer’s offer. – Impact on Employees: Employees of the target company may face uncertainty, job cuts, or changes in corporate culture. – Legal and Regulatory Scrutiny: Hostile takeovers can face legal challenges and regulatory reviews. – Market Perception: The success or failure of a hostile takeover can impact investor and market perceptions of both companies.
AdvantagesAccess to Assets: The acquirer gains access to the target company’s assets, operations, and potential synergies. – Market Expansion: It can lead to market expansion and increased market share. – Shareholder Gains: Shareholders of the target company may receive a premium on their shares. – Value Creation: The acquirer may believe that the combination of the two companies will create value. – Competitive Advantage: A successful hostile takeover can provide the acquirer with a competitive advantage.
DrawbacksHostility and Conflict: Hostile takeovers often involve contentious and adversarial tactics. – Legal Costs: Legal battles and regulatory approvals can be expensive. – Employee Impact: Employees may face job uncertainty and changes in working conditions. – Integration Challenges: Merging two companies can be complex and may not always deliver the expected benefits. – Market Reputation: Hostile takeovers can negatively impact the reputation of both the acquirer and target.
ApplicationsCorporate Strategy: Companies may employ hostile takeovers as a strategic growth or consolidation strategy. – Market Expansion: Entering new markets or industries through acquisition. – Competitive Advantage: Gaining a competitive edge through the acquisition of a rival. – Value Creation: Combining resources and capabilities to create shareholder value. – Financial Gain: Acquirers may believe that a target company’s assets are undervalued.
Use CasesKraft’s Bid for Cadbury: In 2010, Kraft Foods pursued a hostile takeover of British confectionery company Cadbury. Kraft’s bid was initially rejected by Cadbury’s board, but it ultimately succeeded after raising its offer. – Pfizer’s Attempt to Acquire AstraZeneca: In 2014, pharmaceutical giant Pfizer made a hostile bid to acquire AstraZeneca, a UK-based drug manufacturer. The bid faced significant political and regulatory scrutiny and was ultimately abandoned. – Hostile Takeover of Airgas: In 2010, Air Products and Chemicals made a hostile bid to acquire Airgas, a supplier of industrial gases. The takeover attempt involved legal battles and proxy contests and was ultimately successful. – Oracle’s Acquisition of PeopleSoft: In 2003, Oracle pursued a hostile takeover of PeopleSoft, a competitor in the enterprise software industry. The takeover attempt resulted in a protracted legal battle and significant media attention. – Hostile Takeover of Yahoo by Microsoft: In 2008, Microsoft made a hostile bid to acquire Yahoo, an internet company. Yahoo’s board rejected the offer, leading to discussions on the future of the company.

Understanding hostile takeover

To take control of the target, the acquirer interacts with the target’s shareholders and offers to purchase their shares at a premium.

When the acquirer has purchased enough shares to receive a controlling interest, the hostile takeover is successful.

Hostile takeovers became popular in the United States during the 1980s, with 62 worth more than $50 million occurring between 1984 and 1986 alone.

Such was their prevalence that they influenced perceptions of American corporate culture.

The two types of a hostile takeover

There are two main strategies to help the acquirer complete a hostile takeover:

Tender offer

As mentioned in the previous section, an acquiring company might offer to purchase stock in the target company from shareholders at a premium to the market value.

The intention here is to obtain a controlling interest in the target by holding at least 50% or more of the voting stock.

Proxy fight

The second option to acquire the target company is by proxy vote. In this case, the acquiring company convinces shareholders in the target company to vote their management out.

With directors opposing the move ousted, the acquiring company can establish a team that approves the takeover.

Why do hostile takeovers occur?

Many hostile takeovers occur because previous friendly takeover attempts have failed for whatever reason.

In any case, most hostile takeovers occur because the acquirer wants to:

  • Increase revenue.
  • Remove a competitor from the industry.
  • Gain access to copyrighted, patented, or other proprietary technology.
  • Gain access to desirable employee skills or specializations. 
  • Control access to resources, raw materials, or specific supply chain relationships.

For shareholders in the target company, many hostile takeovers are simply driven by the lure of capital gains.

Hostile takeover examples

Examples of hostile takeovers include:

InBev and Anheuser Busch

International beverage company InBev attempted to acquire American beer company Anheuser Busch by ousting its board of directors.

When the attempt failed, InBev offered shareholders a premium price on their shares to secure the deal.

Kraft Foods and Cadbury

In 2009, Kraft made an unsuccessful $16.3 billion bid for English chocolatier Cadbury.

The bid was increased to around $19 billion the following year, which Cadbury was forced to accept after resisting the deal for months.

Shareholders in the company received a 5% premium on their holdings.

Sanofi-Aventis and Genzyme Corporation

French pharmaceutical giant Sanofi-Aventis decided to acquire American biotech company Genzyme in 2010.

The former made several friendly takeover attempts which were ultimately turned down, so the Sanofi-Aventis CEO began communicating with shareholders directly to gather support for the acquisition.

Nine months later, the deal was done.

The Luxury Wars

As explained in the Prada business model analysis back in the late 1990s, the luxury industry consolidated in a set of wars to create the next multi-brand group.

It all started with the attempt to take over Gucci, by Prada’s CEO Patrizio Bertelli, which had acquired a good chunk of Gucci, apparently as an attempt to seal a strategic partnership with the company.

In previous years, Gucci had gone through a set of internal battles to control the company.

First, the litigious Gucci family had gone through many legal battles for the takeover of the company.

Eventually, this led to the ousting of most of the company and the successful attempt of Maurizio Gucci (the son of Rodolfo, which was one of the second generations of the Gucci family).

Indeed, for some context, Gucci was founded in the 1920s by Guccio Gucci, which successfully transformed the company into one of the more renowned Italian fashion boutiques.

Yet, Guccio’s sons, Aldo, Rodolfo, and Vasco, primarily transformed the business.

Aldo led the international expansion of Gucci, which transformed it into one of the most renowned fashion houses of the 1970s.

In contrast, Rodolfo and Vasco led the creative and industrial side back in Italy.

The second generation of Gucci was highly successful in building Gucci into one of the most successful fashion brands in the world.

Gucci was the first Italian company to successfully expand in the US, to become a brand comparable to other French fashion brands, and it managed to IPO back in 1995.

Yet, Gucci also set the stage for a family feud, made of legal battles, that would make it into the most talked about until the 1990s.

Finally, after internal wars that lasted for years, Maurizio Gucci, son of Rodolfo, managed to take over control of the company, thanks to the partnership with Investcorp, an investment fund that had put its eyes on Gucci.

As Maurizio Gucci took control of Gucci, he tried to rebuild the brand, by re-organising it around the core product lines.

Yet, after 2-3 years of unsuccessful attempts, Investcorp played its cards and ousted Maurizio Gucci.

As the last Gucci was ousted from the company’s management and ownership, the company was led by Domenico De Sole, an Italian-born, US-adopted lawyer, who had grown into Gucci, from Maurizio Gucci’s father’s loyal lawyer to the company’s CEO.

At the same time, as Gucci reorganized its management, Tom Ford, a young designer, finally became the head of the company’s creative side (Tom Ford would sell his own brand to Estée Lauder, in 2022, for $2.8 billion!).

The duo De Sole-Ford (they are still partners today, and De Sole also helped sell Ford’s company to Estée Lauder in 2022) would go on to create one of the most successful business turnarounds of the last decades.

Gucci went from a company losing a ton of money in the mid-90s to an extremely profitable company at the turn of the century.

By the late 1990s, thus, Gucci had become an interesting target for other brands, primarily Prada, who started the bidding wars.

Indeed, as Bertelli, Prada’s CEO, had bought a substantial chunk of shares from Gucci, he tried to build a strategic partnership with the company.

Yet, Gucci now run by Domenico De Sole and Tom Ford, didn’t want to deal with Bertelli or lead a merger between the two companies.

This opened up the way for another company that would try all it could to conquer Gucci, which was LVMH.

At the time, LVHM had already become a luxury empire thanks to the incredible business acumen of Bernard Arnault, which started his career by channeling the resources from the family real estate business toward iconic brands.

By the late 1990s, LVMH had grown into the first multi-brand fashion house.

In 1998-9, the luxury industry lived a strange moment. As we saw back then, Patrizio Bertelli (Prada’s CEO) seemed to have foreseen the future.

After he had acquired a good chunk of Gucci shares, which resembled an unusual move, he tried a take over, which would be almost impossible for the time.

Indeed, while Gucci was a rival of Prada, Prada was smaller than Gucci. While Bertelli’s reasoning might have been driven also by the fear of Gucci entering into agreements with some of Prada’s artisans in the Scandicci region in Italy, Bertelli backed down when Bernard Arnault came in.

As we saw, the paradox is that at the time, Prada was smaller than Gucci and didn’t have the financial resources to take over the company.

So eventually, Prada sold its stake to LVMH for an incredible financial gain.

While Arnauld initially claimed his takeover of Google was a friendly one, in reality, it came out almost immediately that he was only trying to get more and more control of the company to finally make Gucci one of the brands under the control of LVMH.

Indeed, Arnauld’s tactics were well-known at that point.

He managed to gain control of many valuable fashion brands and reunite the brand’s LV and MH under the same umbrella by playing the owners of those two brands against each other while he took control of their group!

Yet, Gucci, under Domenico De Sole and Tom Ford, didn’t like the idea of being taken over by LVMH to become one of the brands under Arnauld’s control!

Thus, the war ensued.

In an incredible deal of the last moment, Gucci found a white knight, into another French billionaire, François-Henri Pinault.

Pinault understood the time window to consolidate in the fashion industry was right, and he convinced De Sole and Tom Ford to close a deal with him by making Gucci the central business unit in charge of developing a multi-brand strategy for PPR (which would eventually become Kering)!

LVMH, which had amassed a substantial stake in Gucci, was diluted as Gucci issued stocks in favor of Pinault, thus making Arnauld slowly back up from the deal.

That was the beginning of the fight between two groups that would eventually dominate the whole luxury fashion industry: LVMH (controlling brands like Christian Dior, Fendi, Givenchy, Marc Jacobs, Stella McCartney, Loewe, Loro Piana, Bulgari, and Tiffany & Co) and Kering (controlling brands like Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen)!

Key takeaways

  • A hostile takeover occurs when one company attempts to seize control of another company despite objections from that company’s management.
  • A hostile takeover usually occurs because most companies are focused on growth. Acquiring another company can increase revenue, reduce competition, and grant access to proprietary technology, skilled employees, and important supply chain relationships.
  • Instances, where a hostile takeover was facilitated by shareholders, include the acquisition of Anheuser Busch by InBev and the acquisition of Cadbury by Kraft Foods. Another example is the takeover of Genzyme by Sanofi-Aventis, where shareholders were approached directly after friendly takeover attempts failed.

Key Highlights

  • Definition and Contrast with Friendly Takeovers: A hostile takeover occurs when one company (the “acquirer”) seeks to purchase another company (the “target”) despite opposition from the target’s management. Unlike friendly takeovers where both parties cooperate for a mutually beneficial outcome, hostile takeovers involve resistance from the target’s management.
  • Process of Hostile Takeover: The acquirer interacts with the target’s shareholders and offers to purchase their shares at a premium. When the acquirer accumulates enough shares to gain a controlling interest, the hostile takeover succeeds.
  • Popularity and Influence: Hostile takeovers gained prominence in the US during the 1980s, influencing perceptions of American corporate culture. During this period, numerous high-value hostile takeovers occurred, reflecting the aggressive nature of these actions.
  • Strategies for Hostile Takeovers:
    • Tender Offer: The acquirer offers to purchase stock from the target’s shareholders at a premium, aiming to control at least 50% of the voting stock.
    • Proxy Fight: The acquirer seeks to convince target company shareholders to vote out the existing management. Once the management is replaced, the acquirer’s team takes control.
  • Motivations for Hostile Takeovers: Companies often resort to hostile takeovers when previous friendly takeover attempts fail. Common motivations include:
    • Increasing revenue.
    • Eliminating competition in the industry.
    • Gaining access to proprietary technology.
    • Acquiring skilled employees or specialized expertise.
    • Controlling essential resources or supply chain relationships.
  • Examples of Hostile Takeovers:
    • InBev and Anheuser Busch: InBev attempted a hostile takeover of Anheuser Busch by purchasing shares and offering a premium price to shareholders. The attempt initially failed, but InBev eventually secured the deal.
    • Kraft Foods and Cadbury: Kraft’s hostile takeover bid for Cadbury faced resistance initially. However, after increasing the offer, Kraft managed to acquire Cadbury.
    • Sanofi-Aventis and Genzyme Corporation: Sanofi-Aventis pursued a hostile takeover of Genzyme after friendly attempts were rejected. The acquirer directly communicated with shareholders to gain support, leading to a successful acquisition.
  • Luxury Wars and Industry Consolidation: The luxury industry saw fierce battles for control, with companies like Prada, LVMH, and Kering competing for brands like Gucci and others. These battles influenced the consolidation of the luxury fashion landscape and led to the dominance of key multi-brand groups.

Connected Economic Concepts

Market Economy

market-economy
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

positive-and-normative-economics
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

how-does-inflation-affect-the-economy
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

asymmetric-information
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

autarky
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

demand-side-economics
Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

supply-side-economics
Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

oligopsony
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

paradox-of-thrift
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

circular-flow-model
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

trade-deficit
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

rational-choice-theory
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

conflict-theory
Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

peer-to-peer-economy
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.

Knowledge-Economy

knowledge-economy
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

labor-unions
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

bottom-of-the-pyramid
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Glocalization

glocalization
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

market-fragmentation
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

l-shaped-recovery
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

comparative-advantage
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

easterlin-paradox
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

economies-of-scope
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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