Digital Transformation and the Value of Incumbents' Complementary Assets: The Substitution Effect of Digital Platforms

Abstract

In recent years, peer-to-peer platforms have entered several industries and challenged the way in which incumbents do business. Instead of owning any assets directly, they focus on matching buyers with sellers that own the required assets and are willing to share them. Therefore, these platforms are generally considered a competitive threat to traditional businesses, particularly to those that are positioned in the same market segment, which is usually the lower end of the market. In this paper, we show that the main threat that peer-to-peer platforms pose to incumbents is not necessarily the direct competition effect but rather the shift on the demand-side that they trigger. By shifting consumer habits towards using digital platforms, they force incumbents to increasingly use these platforms to promote their physical assets as well. For incumbents who have traditionally benefited from using their own complementary downstream assets to promote their physical assets, this poses a major challenge because digital platforms act as a substitute for these downstream assets and decrease their value. Using data from the hotel industry in the state of Texas, we show that the incumbents that are ultimately affected the most by peer-to-peer platforms are not necessarily the ones operating in the same market segment, but those whose complementary downstream assets will become obsolete as more business is shifted to digital platforms.