Harvard Business Review
In the digital economy, scale is no guarantee of continued success. After all, the same factors that help an online platform expand quickly—such as the low cost of adding new customers—work for challengers too. What, then, allows platforms to fight off rivals and grow profits? Their ability to manage five aspects of the networks they’re embedded in:
- strength of network effects
- clustering, or fragmentation into many local markets
- the risk of disintermediation, wherein users bypass a hub and connect directly
- vulnerability to multi-homing, which happens when users form ties with two or more competing platforms
- network bridging, which allows platforms to leverage users and data from one network in another network
When entrepreneurs are evaluating a digital platform business, they should look at these dynamics—and the feasibility of improving them—to get a more realistic picture of its long-term prospects.
Management Science
We study compatibility decisions of two competing platform owners that generate profits through both hardware sales and royalties from content sales. We consider a game-theoretic model in which two platforms offer different standalone utilities to users. We find that incentives to establish one-way compatibility—the platform owner with smaller standalone value grants access to its proprietary content application to users of the competing platform—can arise from the difference in their profit foci. As the difference in the standalone utilities increases, royalties from content sales become less important to the platform owner with greater standalone value, but more important to the other platform owner. One-way compatibility can thus increase asymmetry between the platform owners’ profit foci and, given a sufficiently large difference in the standalone utilities, yields greater profits for both platform owners. We further show that social welfare is greater under one-way compatibility than under incompatibility. We also investigate how factors such as exclusive content and hardware-only adopters affect compatibility incentives.
Strategic Management Journal
This paper studies the impact of platform-owner entry threat on complementors in platform-based markets. We examine how app developers on the Android mobile platform adjust innovation efforts (rate and direction) and value-capture strategies in response to the threat of Google's entry into their markets. We find that after Google's entry threat increases, affected developers reduce innovation and raise the prices for the affected apps. However, their incentives to innovate are not completely suppressed; rather, they shift innovation to unaffected and new apps. Given that many apps already offer similar features, Google's entry threat may thus reduce wasteful development efforts. We discuss the implications of these results for platform owners, complementors, and policy makers.
Journal of Economics & Management Strategy
As platform owners continue to expand their ecosystems, many of them have started to provide consumers with their own complementary applications. These moves position the platform owners as direct competitors to their complementors. This paper surveys empirical studies that examine the direct entry of platform owners into complementors’ product spaces. It finds that both the motivation and impact of such entries on complementors are multifaceted. The motivation behind platform owners’ direct entry goes beyond value capture, and the impact of platform entry on complementors varies across empirical settings. It identifies several future research directions that can help advance our understanding of the relationships between platform owners and complementors.
Strategic Management Journal
Platform owners sometimes enter complementors' product spaces to compete against them directly. Prior studies have offered two possible explanations for such entries: platform owners may target the most successful complementors so as to appropriate value from their innovations, or they may target poor performing complementors to improve the platforms' overall quality. Using data from Amazon.com, we analyze the patterns of Amazon's entry into its third-party sellers' product spaces. We find evidence consistent with the former explanation: the likelihood of Amazon's entry is positively correlated with the popularity and customer ratings of third-party sellers' products. We also find that Amazon's entry reduces the shipping costs of affected products and hence increases demand. Results also show that small third-party sellers affected by Amazon's entry appear to be discouraged from growing their businesses on the platform subsequently. The results have implications for complementors participating in various platform-based markets.
MIS Quarterly
Organizations today can use both crowds and experts to produce knowledge. While prior work compares the accuracy of crowd-produced and expert-produced knowledge, we compare bias in these two models in the context of contested knowledge, which involves subjective, unverifiable, or controversial information. Using data from Encyclopædia Britannica, authored by experts, and Wikipedia, an encyclopedia produced by an online community, we compare the slant and bias of pairs of articles on identical topics of U.S. politics. Our slant measure is less (more) than zero when an article leans towards Democratic (Republican) viewpoints, while bias is the absolute value of the slant. We find that Wikipedia articles are more slanted towards Democratic views than are Britannica articles, as well as more biased. The difference in bias between a pair of articles decreases with more revisions. The bias on a per word basis hardly differs between the sources because Wikipedia articles tend to be longer than Britannica articles. These results highlight the pros and cons of each knowledge production model, help identify the scope of the empirical generalization of prior studies comparing the information quality of the two production models, and offer implications for organizations managing crowd-based knowledge production.
Strategy Science
We study how platform firms use repositioning and cost-cutting in response to competition, elucidate external and internal factors that constrain or enable these responses, and examine how the firms’ responses affect their performance. Our empirical context is the U.S. newspaper industry, which has experienced increased competition following the entry of Craigslist, an online provider of classified ads. We find that when Craigslist enters a newspaper’s market, the newspaper repositions itself away from other newspapers by changing its content. This results in greater differentiation between newspapers in a market but occurs primarily in markets in which reader preferences are heterogeneous. When reader preferences are homogeneous, newspapers are more likely to engage in cost-cutting. Both responses are more pronounced for newspaper firms whose sister firms have already experienced Craigslist’s entry. We also find that failure to design the right response harms competitive viability. These findings offer important implications for many platform firms operating in today’s digital economy.
Organization Science
We investigate the effect of patent wars on firm strategy using data from the global smartphone market. In particular, we analyze how smartphone vendors not involved in patent litigation strategically respond to increased litigation risks in this industry. We find that, as patent wars intensify, smartphone vendors not involved in patent litigation shift their business foci to markets with weak intellectual property (IP) protection. This shift is more pronounced for vendors with smaller stocks of patents and whose home markets have weak IP systems. Interestingly, we find that the patent wars intended to hamper the growth of the Android platform may have merely shifted Android’s sales to weak IP countries. This study provides empirical evidence on how heterogeneity in national patent systems is related to firm strategy and platform competition. Our findings suggest that rivals in global markets may not be deterred by patent enforcement because of institutional arbitrage opportunities.
Management Science
How do firms respond to entry in multi-sided markets? We address this question by studying the impact of Craigslist, a website providing classified-advertising services, on local U.S. newspapers. We exploit temporal and geographical variation in Craigslist's entry to show that newspapers with greater reliance on classified-ad revenue experience a larger drop in classified-ad rates after Craigslist's entry. The impact of Craigslist's entry on the classified-ad side appears to propagate to other sides of the newspapers' market. On the subscriber side, these newspapers experience an increase in subscription prices, a decrease in circulation, and an increase in differentiation from each other. On the display-ad side, affected newspapers experience a decrease in display-ad rates. We also find evidence that affected newspapers are less likely to make their content available online. Finally, we estimate that Craigslist's entry leads to $5 billion in year 2000 dollars in savings to classified-ad buyers during 2000–2007.
Harvard Business Review
Following the path of companies such as Apple and Amazon, more and more firms are trying to become not just product purveyors but also platform providers, facilitating direct connections between customers and other groups. Although launching a platform can generate new revenue, success is not automatic. After studying more than 20 companies that have tried to move from products to platforms, we point to four practices that can separate winners from losers.
Strategic Management Journal
We examine how reducing search frictions in secondary markets affects the value appropriated by firms in primary markets. We characterize two effects on primary-market firms caused by intermediaries entering secondary markets: the “cannibalization” and “option value” effects. Separation between primary and secondary markets can drive which of the two effects dominates. Firms selling valuable and scarce products aremore likely to have separate primary and secondary markets, and will therefore appropriate more value when secondary markets thicken. Firms selling products that are not valuable and scarce will be hurt. Further, we hypothesize that firms have incentives to engineer scarcity by limiting supply when secondary markets thicken to separate primary and secondary markets. We find support for these hypotheses in the U.S. concert ticket industry.
Information Systems Research
The diffusion of the Internet and digital technologies has enabled many organizations to use the open-content production model to produce and disseminate knowledge. While several prior studies have shown that the open-content production model can lead to high-quality output in the context of uncontroversial and verifiable information, it is unclear whether this production model will produce any desirable outcome when information is controversial, subjective, and unverifiable. We examine whether the open-content production model helps achieve a neutral point of view (NPOV) using data from Wikipedia's articles on U.S. politics. Our null hypothesis builds on Linus' Law, often expressed as "Given enough eyeballs, all bugs are shallow." Our findings are consistent with a narrow interpretation of Linus' Law, namely, a greater number of contributors to an article makes an article more neutral. No evidence supports a broad interpretation of Linus' Law. Moreover, several empirical facts suggest the law does not shape many articles. The majority of articles receive little attention, and most articles change only mildly from their initial slant. Our study provides the first empirical evidence on the limit of Linus' Law. While many organizations believe that they could improve their knowledge production by leveraging communities, we show that in the case of Wikipedia, there are aspects, such as NPOV, that the community does not always achieve successfully.
Management Science
Many scholars argue that when incentivized by ad revenue, content providers are more likely to tailor their content to attract "eyeballs," and as a result, popular content may be excessively supplied. We empirically test this prediction by taking advantage of the launch of an ad-revenue-sharing program initiated by a major Chinese portal site in September 2007. Participating bloggers allow the site to run ads on their blogs and receive 50% of the revenue generated by these ads. After analyzing 4.4 million blog posts, we find that, relative to nonparticipants, popular content increases by about 13 percentage points on participants' blogs after the program takes effect. About 50% of this increase can be attributed to topics shifting toward three domains: the stock market, salacious content, and celebrities. Meanwhile, relative to nonparticipants, participants' content quality increases after the program takes effect. We also find that the program effects are more pronounced for participants with moderately popular blogs and seem to persist after participants enroll in the program.
American Economic Review
The literature on the private provision of public goods suggests an inverse relationship between incentives to contribute and group size. We find, however, that after an exogenous reduction of group size at Chinese Wikipedia, the nonblocked contributors decrease their contributions by 42.8 percent on average. We attribute the cause to social effects: contributors receive social benefits that increase with both the amount of their contributions and group size, and the shrinking group size weakens these social benefits. Consistent with our explanation, we find that the more contributors value social benefits, the more they reduce their contributions after the block.
Strategic Management Journal
This paper provides the first formal model of business model innovation. Our analysis focuses on sponsor-based business model innovations where a firm monetizes its product through sponsors rather than setting prices to its customer base. We analyze strategic interactions between an innovative entrant and an incumbent where the incumbent may imitate the entrant's business model innovation once it is revealed. The results suggest that an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model or conceal it by adopting a traditional business model. We also show that the value of business model innovation may be so substantial that an incumbent may prefer to compete in a duopoly rather than to remain a monopolist.
Management Science
We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or the number of ads a product carries, we allow the incumbent to consider changes in its business model. We consider four alternative business models, a subscription-based model, an ad-sponsored model, a mixed model in which the incumbent offers a product that is both subscription-based and ad-sponsored, and a dual model in which the incumbent offers two products, one based on the ad-sponsored model and the other based on the mixed-business model. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations. We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through the subscription-based or the ad-sponsored model, rather than the mixed or the dual model, because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.
Strategic Management Journal
This paper examines the relative importance of platform quality, indirect network effects, and consumer expectations on the success of entrants in platform-based markets. We develop a theoretical model and find that an entrant's success depends on the strength of indirect network effects and on the consumers' discount factor for future applications. We then illustrate the model's applicability by examining Xbox's entry into the video game industry. We find that Xbox had a small quality advantage over the incumbent, PlayStation 2, and the strength of indirect network effects and the consumers' discount factor, while statistically significant, fall in the region where PlayStation's position is unsustainable.
Journal of Marketing
This article examines how product and consumer characteristics moderate the influence of online consumer reviews on product sales using data from the video game industry. The findings indicate that online reviews are more influential for less popular games and games whose players have greater Internet experience. The article shows differential impact of consumer reviews across products in the same product category and suggests that firms' online marketing strategies should be contingent on product and consumer characteristics. The authors discuss the implications of these results in light of the increased share of niche products in recent years.
International Journal of Industrial Organization
Economists have debated the extent to which strengthening patent protection spurs or detracts from technological innovation. This paper examines the reduction of software copyright protection in the Lotus v. Borland decision. If patent and copyright protections are substitutes, weakening of one form should be associated with an increased reliance on the other. We find that the firms affected by the diminution of copyright protection disproportionately accelerated their patenting in subsequent years. But little evidence can be found for any harmful effects on firms' performance and incentive to innovate: in fact, the increased reliance on patents is correlated with growth in measures such as sales and R&D expenditures.
