Platform Markets Research Articles

Positive, Negative, and Amplified Network Externalities in Platform Markets

Positive, Negative, and Amplified Network Externalities in Platform Markets

Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms’ responses. (JEL D22, D85, L14, L15, L84)

Estimating and Comparing Cross-side Network Effects for Three Types of Platform Markets

Estimating and Comparing Cross-side Network Effects for Three Types of Platform Markets

How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets

How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets

The Hidden Costs of Fairness in Platform Markets

The Hidden Costs of Fairness in Platform Markets

Smart Timing for Smart Products? Complementor Multihoming in Nascent Platform Markets

Smart Timing for Smart Products? Complementor Multihoming in Nascent Platform Markets

How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets

How Lending Experience and Borrower Credit Influence Rational Herding Behavior in Peer-to-Peer Microloan Platform Markets

The Impacts of Tax Policy on Platform Markets in Digital Economy

This paper examines the effects of governmental policy in digital economy, especially the tax policy. We analyze how preferential tax policy affects the platform market and customer welfare. First, our findings demonstrate that prices have negative relation with preferential tax level in incompatible case and no relation in asymmetric compatible case. Corporation profits have positive relation with preferential tax level in asymmetric compatible case and no relation in incompatible case. Second, we derive a specific range in which preferential tax level could make it beneficial for both customers and platforms to improve compatibility. High compatibility is only good for platforms but not for customers when preferential tax level is too high. And oppositely, it’s only good for customers when preferential tax level is too low, but platforms have no incentives to support for it.

Platform Categorization and Complement Performance: Evidence from Mobile Apps

Managing complement heterogeneity has a salient impact on value creation in platform markets, but remains largely underexamined in the platform governance literature. Local homogenization (i.e., increasing complement homogeneity within a product category) can improve customer-complement matching efficiency, without weakening the network effect of the entire platform market. However, although local homogenization enables customers to better identify potentially fitted complements, the presence of more fitted complements makes customers more selective in making payments. Thus, we hypothesize that local homogenization increases digital complements’ new installs, but reduces revenue generation from each installed customer. By exploiting the removing of shopping mobile apps from the lifestyle category on Apple’s App store as an exogenous shock which increases local homogeneity of the lifestyle category, our empirical findings support for our propositions. Since new installs and revenue are both strategically important for digital complementors, this research illustrates a nuanced relationship between platform categorization and complement performance.

Regulation of platform market access by the United States and China: Neo‐mercantilism in digital services

AbstractChina and the United States host the world's largest digital platforms. Platforms are multisided markets that facilitate value‐creating exchanges among users, such as social media, e‐commerce, software QJ;application downloads, search, email, and cloud services. Internet access and the purely digital nature of many of the products and services make digital platforms potentially global in scope. This means that the rules and restrictions governing the flow of capital and information services among national markets strongly influence the economic and social potential of digital platforms. The paper conducts a sequential analysis of the rise of barriers to the United States–China trade in ICT and digital platform markets from 2000 to 2021. We find that China's thriving platform economy was relatively open, competitive and market‐driven in its early stages, and benefited from U.S. capital and the entry of U.S. firms. Since 2009, both countries have progressively restricted access to each other's domestic information services markets. In both cases, the primary stated rationale involved national security claims rather than trade policy concerns. Drawing on International Political Economy theory, we label the United States–China interaction pattern digital neo‐mercantilism. Digital neo‐mercantilism fuses the power and security of the national state with economic development in the digital economy. Policymakers represent information flows and digital technologies in domestic policy discourse as critical to the security and relative power of the state, and pursue various forms of industrial policy, data localization, trade protectionism, or exclusion of foreigners as a result. Both the United States and China are following this policy.

Predation or Competition: Demystifying the Dilemma in Platform Markets

Predatory pricing, as an instrument of abuse of dominance, has always been a conundrum for antitrust regulators, academia, and businesses alike. Starting from the very rationality of predatory pricing strategy to various tests that form part of the assessment framework adopted by competition agencies and courts, there has hardly been a consensus. This paper starts by highlighting how frictions and dilemmas have been further intensified in digital economy markets and highlights how, faced with “hyper-competition,” and riding on network effects and big data, deep discounting and abysmally low pricing is the most widely adopted pricing strategy. This calls for a revised assessment framework to ensure that competition authorities do not end up penalising efficient low pricing. To this end, the paper highlights myths associated with low pricing strategies which may not merit antitrust intervention, while also pointing out fallacies of the existing assessment framework. The paper further suggests an alternative dominance assessment and pitches for developing novel theories of harm that factor in the characteristic features of digital markets.

Halo or Cannibalization? How New Software Entrants Impact Sales of Incumbent Software in Platform Markets

Platform markets involve indirect network effects as two or more sides of a market interact through an intermediary platform. Many platform markets consist of both a platform device and corresponding software. In such markets, new software introductions influence incumbent software sales, and new entrants may directly cannibalize incumbents. However, entrants may also create an indirect halo impact by attracting new platform adopters, who then purchase incumbent software. To measure performance holistically, this article introduces a method to quantify both indirect and direct paths and determine which effect dominates and when. The authors identify relevant moderators from the sensations–familiarity framework and conduct empirical tests with data from the video game industry (1995–2019). Results show that the direct impact often results in cannibalization, which generally increases when the entrant is a superstar or part of a franchise. For the indirect halo impact, superstar entrants significantly increase platform adoption, which can help all incumbents. Combining the direct and indirect impacts, the authors find that only new software that is both a superstar and part of a franchise increases platform adoption sufficiently to overcome direct cannibalization and achieve a net positive effect on incumbent software; all other types of entrants have a neutral or negative overall effect.

Network Interconnectivity and Entry into Platform Markets

Digital technologies have led to the emergence of many platforms in our economy today. In certain platform networks, buyers in one market purchase services from providers in many other markets, whereas in others, buyers primarily purchase services from providers within the same market. Accordingly, network interconnectivity—which measures the degree to which consumers in one market purchase services from service providers in a different market—varies across different industries. We examine how network interconnectivity affects interactions between an incumbent platform serving multiple markets and an entrant platform seeking to enter one of these markets. Our model yields several interesting results. First, even if the entrant can advertise at no cost, it still may not want to make every user in a local market aware of its service, as doing so may trigger a competitive response from the incumbent. Second, having more mobile buyers, which increases interconnectivity between markets, can reduce the incumbent’s incentive to fight and, thus, increase the entrant’s incentive to expand. Third, stronger interconnectivity between markets may or may not make the incumbent more defensible: when advertising is not costly and mobile buyers consume in both their local markets and the markets they visit, a large number of mobile buyers will increase the entrant’s profitability, thereby making it difficult for the incumbent to deter entry. However, when advertising is costly or mobile buyers only consume in the markets they travel to, a large number of mobile buyers will help the incumbent deter entry. When advertising cost is at an intermediate level, the entrant prefers a market with moderate interconnectivity between markets. Fourth, we find that even if advanced targeting technologies can enable the entrant to also advertise to mobile buyers, the entrant may choose not to do so in order to avoid triggering the incumbent’s competitive response. Finally, we find that the presence of network effects is likely to decrease the entrant’s profit. Our results offer managerial implications for platform firms and help understand their performance heterogeneity.

Judging a Book by Its Cover?: Analysing the Indian Approach to Defining Platform Markets

One of the challenges before competition law today is to develop criteria for market definition in platform markets. This is because the old tests for market definition do not neatly apply to platform markets, given that these markets have certain peculiarities. For instance, should platform markets be defined as one or separate markets on each side of the platform? As platforms are of different types, it is difficult to develop rules that can account for the diversity of various platforms. Platforms markets are also dynamic and our understanding of them is evolving. For this reason, with a few exceptions, competition authorities have been hesitant to lay down rules on how platform markets should be defined – to the point that market definition has been left open in many cases. However, the Competition Commission of India (CCI), which is an active antitrust enforcer, has defined platform markets or given its opinion on market definition of platforms in a number of cases. However, there is limited literature on the CCI’s market definition practices. This presents an interesting opportunity to examine the extent to which Indian competition law is ready for the challenges presented by digital markets and to analyse the CCI’s decisional practice with specific focus on market definition. The paper first provides a framework within which such an analysis can be conducted by highlighting the key issues identified in academic scholarship for defining platform markets. It then applies this understanding to the analysis of recent CCI orders. The study finds that the CCI has not changed the way it defines markets to account for the particularities of multi-sided platforms. The CCI’s approach has failed to consider the interdependencies operating on both sides of a platform which has led the CCI to make errors in assessing the competitive constraints operating on market participants, to make its subsequent analysis of dominance and abuse ambiguous and ultimately to make the process of market definition redundant. At the same time, CCI’s recent telecom market study report presents some hope that its approach is evolving with the times.

Anticompetitive Effects and Market Definition in Platform (and Non-Platform) Markets

Market definition is a highly contested topic in antitrust. Courts’ approaches to market definition are admittedly flawed, and the case originating modern market definition, the Cellophane case, is best known in antitrust circles as the name of an economic blunder: the “Cellophane fallacy.” Yet market definition finds itself center-stage in antitrust regulation of modern platform markets and was the central issue in the Supreme Court’s first case explicitly addressing platforms, Ohio v. American Express. Justice Breyer’s dissent in that case went beyond challenging the majority’s market definition to challenge the need to engage in market definition at all. He argued that market definition was unnecessary because the district court had found actual anticompetitive effects. That notion has found purchase in both scholarship and legislative proposals that would eliminate market definition in antitrust cases if the plaintiff can show anticompetitive effects. This paper interrogates both modern criticisms of market definition and Justice Breyer’s assertion that market definition is not necessary if a court finds anticompetitive effects through direct evidence. That claim is mistaken on both economic and normative grounds. As an economic matter, the price increases the court observed in American Express are not probative of anticompetitive effect absent an understanding of their effects on the broader market, which cannot be determined without a market definition. American Express (and platform markets) present a particularly strong case against relying on market observations to infer anticompetitive effects, but the point holds for non-platform markets as well. As a normative matter, Justice Breyer’s presumption ignores that, in order to determine whether a particular practice is “anticompetitive,” it is necessary to define what are and are not legitimate sources of market power. A similar error is present in most criticisms of market definition. Market definition is usually performed in service of measuring market power, and most criticisms relate to its accuracy in doing so. But market definition not only measures market power, it characterizes it. As informed by the content of antitrust law, market definition distinguishes between permissible and impermissible accumulations of market power. Instead of something to be avoided because of its economic fallibility, market definition should be embraced as a way to give meaning to antitrust inquiries. Debates over market definition have been had largely along economic lines, but the market definition inquiry is inherently normative. That has always been the case. Donald Turner’s original identification of the Cellophane fallacy was based not on abstract economics but on his views on what the antitrust law should permit. Recognizing market definition as a step in both identifying and defining legitimate forms of competition resituates market definition from being a step in an algorithm to informing the competition that antitrust law seeks to protect.

Digital Platform Markets of ASEAN and India: Implications for Cooperation with Korea

The growth of digital platform markets in ASEAN and India is prominent. With COVID-19, demands for economic and social activities centered on digital platforms are expected to rise further; especially five sectors (e-commerce, sharing economy, education, healthcare and fintech) are fast growing seectors. Korean is a potential partner of ASEAN countries and India. Korea's Digital New Deal policy now stresses tasks such as sharing and utilizing data, convergence of 5G and artificial intelligence across whole industries, spreading digital education, digital healthcare, etc., which are closely related to the economic and social needs of ASEAN countries and India. In order to promote regulatory harmonization and cooperation with ASEAN and India, it is necessary for Korea to promote digital economy and trade agreements.

On the Private and Social Value of Consumer Data in Vertically-Integrated Platform Markets

We characterize and compare the private and social incentives to collect consumer data by a vertically-integrated online intermediary who competes with third-party sellers listed on its platform and is required by regulation to share with rivals all the information it gathers. With linear intermediation fees and price competition, the intermediary over-invests in accuracy compared to the social optimum when the intra-platform competition is sufficiently weak and when demand is not too responsive to quality. By contrast, the intermediary tends to under-invest in accuracy when the intra-platform competition is strong enough, and demand is sufficiently responsive to quality. With quantity competition, the intermediary always over-invests in accuracy. Importantly, when consumers exhibit privacy concerns, the over-investment problem worsens, whereas the under-investment problem mitigates. We also investigate the impact of alternative (non-linear) contractual arrangements.

First- or Second-Mover Advantage? The Case of IT-Enabled Platform Markets

First- or Second-Mover Advantage? The Case of IT-Enabled Platform Markets

First- or Second-Mover Advantage? The Case of IT-Enabled Platform Markets

Information technology-enabled platforms are playing an increasingly important role in the global economy. While some successful platforms entered their respective markets as pioneers, others were able to achieve market dominance despite starting as foll

Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

The entry of firms into a platform has an ambiguous effect on the profitability of incumbent firms' operating on the platform: While entry increases competitive pressure on incumbents, supply-side expansion may attract new consumers---effectively increasing total platform size and presumably benefiting all firms. Guided by a simple model, this paper explores how firm entry affects incumbents’ outcomes in a two-sided market. Specifically, I focus on Yelp Transactions Platform, an online platform that connects consumers with local services. I study a quasi-exogenous increase in firms on the platform and exploit geographic variation to employ a difference-in-differences research design. I find that, on average, market expansion favors incumbents, though the average effect masks substantial heterogeneities: High-quality incumbent firms experience a positive effect, whereas low-quality firms perform unambiguously worse. Moreover, the relative magnitudes of these forces relate non-monotonically to platform maturity and size. These findings suggest that incumbent firms operating in platform settings will experience benefits and detriments from firm entry that vary dependent on the incumbents’ and platform’s characteristics.