A Dynamic Contest Model of Platform Competition in Two-Sided Markets

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 mo...

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Bibliographic Details
Published in:Journal of theoretical and applied electronic commerce research 2021, Vol.16 (6), p.2091-2109
Main Authors: Grossmann, Martin, Lang, Markus, Dietl, Helmut M.
Format: Article
Language:English
Subjects:
Competition
Competition policy
Costs
Customer services
dynamic contest
Dynamic models
Electronic commerce
Equilibrium
Externality
Markets
Mobile commerce
network externalities
Organization theory
platforms
Profits
Streaming media
Streaming services
Success
two-sided markets
Video recorders
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Summary: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.
ISSN:0718-1876
0718-1876
DOI:10.3390/jtaer16060117