Abstract
This paper examines the dynamic competition between platform firms in two-sided markets with network externalities. In our model, two platforms compete with each other via a contest to dominate a certain market. If one platform wins the contest, it can serve the market for a certain duration as a monopolistic platform. Our paper shows that platform firms can compensate for cost disadvantages with network effects. A head start (e.g., technological advantage) does not guarantee future success for platform firms. Network effects and cost efficiency are decisive for future success. Interestingly, higher costs of a platform can induce higher platform profits in our dynamic model. Moreover, we find that a platform’s size and profit are not necessarily positively correlated. Our model also provides new insights with respect to the underlying causes for the emergence of market dominance. The combination of technological carry-over and network effects can explain a long-lasting dominance of a platform that benefits from a head start. The necessary preconditions for this emergence are convex costs, small network effects and high carry-over.
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
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call