When will an overconfident entrant in the two-sided market do more good than harm?

Abstract

In business operations, a two-sided platform serves as an intermediary connecting two sets of agents in the two-sided market and new entrants are commonly seen. Due to unfamiliarity with the market, the entrant may be overconfident, i.e., overestimating consumer's utility. In addition, an entrant could bring existing consumers and their attention to the entered business service, which forms a market amplification effect. This study considers the market amplification effect and entrant's overconfidence degree, establishes game-theoretical models for analyzing the results in entry scenario and compares with the monopoly scenario. Three main findings are obtained. First, an overconfident entrant makes both itself and the incumbent overprice, which may explain the increased price of Ele.me and Meituan after the entry of latter. Second, the profit of the entrant is not monotonic, but rather it first increases and then decreases as the overconfidence degree increases. Third, the entrant's overconfidence benefits both the incumbent and entrant when the overconfidence degree is relatively low and the market amplification effect is relatively high. This finding explains why optimistic entrepreneurs are popular in the industry.