Abstract
In this article, we analyze the dynamic competition between two platform firms (A&B) in two-sided markets with network externalities. In Period 1, platform A or B wins the contest in a first stage and can serve the two-sided market monopolistically in a second stage. In Period 2, the two platforms carry over previous investments to a subsequent contest in a first stage, and the winner (A or B) serves the market monopolistically in a second stage. We show that a head start of one platform does not guarantee future success. The combination of cost advantages and network externalities affects the platforms' success. Moreover, a market dominance of a platform does not necessarily result in higher profits.
Highlights
In two-sided markets, companies compete with each other by operating platforms that enable two market sides to interact with each other
Typical examples are issuers of credit cards, who enable merchants to interact with consumers [1], PC operating systems, which enable software developers to interact with users [2], newspapers, which enable advertisers to interact with readers [3], and video game consoles, which enable game developers to interact with gamers [4]
Examples for such winner-take-all or at least winner-take-most markets are video recorders, streaming platforms, messaging platforms, internet auctions, and tablet
Summary
In two-sided markets, companies compete with each other by operating platforms that enable two market sides to interact with each other. The more consumers use a credit card, the more attractive this card becomes to merchants, and the more merchants accept a card, the more attractive this card is for consumers. The more pronounced these cross-side network effects are, the more likely it is that one platform will dominate the entire market. Examples for such winner-take-all or at least winner-take-most markets are video recorders (which were dominated by VHS), streaming platforms (which were dominated by Netflix), messaging platforms (which were dominated by WhatsApp), internet auctions (which were dominated by eBay), and tablet
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