Feng Zhu
Science, Technology and Management PhD
Dissertation Chair: Prof. M. Iansiti
Dynamics of Platform-based Markets
Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations
This paper seeks to answer three questions. First, which drives the success of a platform, installed base, platform quality or consumer expectations? Second, when does a monopoly emerge in a platform-based market? Finally, when is a platform-based market socially efficient? We analyze a dynamic model where an entrant with superior quality competes with an incumbent platform, and examine long-run market outcomes. We find that the answers to these questions depend critically on two parameters: the strength of indirect network effects and consumers' discount factor of future applications. In addition, contrary to the popular belief that indirect network effects protect incumbents and are the source of market inefficiency, we find that under certain conditions, indirect network effects could enhance entrants' quality advantage and market outcomes hence could be more efficient with stronger indirect network effects. We empirically examine the competition between the Xbox and PlayStation 2 consoles. We find that Xbox has a small quality advantage over PlayStation 2. In addition, the strength of indirect network effects and consumers' discount factor in this market are within the range in which platform success is driven by quality advantage and the market is potentially efficient. Counterfactual experiments suggest that PlayStation 2 could have driven Xbox out of the market had the strength of indirect network effects more than doubled or had consumers' discount factor increased by fifty percent.
Group Size and Incentive to Contribute: A Natural Experiment at Chinese Wikipedia
The literature of private provision of public goods suggests that incentive to contribute is inversely related to group size. This paper empirically tests this relationship using field data from Chinese Wikipedia, an online encyclopedia. We exploit an exogenous reduction in group size as a result of the blocking of Wikipedia in mainland China and examine whether individual contributions increase after the block as predicted in the literature. Our result indicates the opposite: individual contributions of unaffected contributors decrease by 42% on average as a result of the block. We attribute the cause to social effects: contributors care about the number of beneficiaries of their contributions. We build a simple model to illustrate how social effects and group size affect individual incentive to contribute. Consistent with our model prediction, we find that the more a contributor values social recognition, the greater the reduction in her contributions after the block. A series of robustness checks appear to support our explanation.
Ad-Sponsored Business Model and Compatibility Incentives
In October 2005, Microsoft and Yahoo announced plans to make their instant messengers compatible: users of one instant messenger can now communicate with users of the other. I show that compatibility is possible only when the two instant messengers are ad-sponsored. Had Microsoft or Yahoo charged fees for the use of its messaging service, the two firms would not have chosen compatibility as compatibility would eliminate product differentiation and Bertrand competition would drive their profits to zero. When the two messengers are ad-sponsored, firms maximize the number of users rather than profit from their users. As compatibility allows them to expand the total market size, they have incentives to be compatible. I also find the tension between market expansion and market sharing: a firm with a large installed-base advantage may not want to be compatible when the cost from sharing the market outweighs the benefit from market expansion. This result helps explain why AOL refused to be compatible even at repeated requests from other instant messenger providers. Finally, I show that compatibility also requires that a sufficiently large number of users single-home. While I use instant messengers to motivate the study, the results are applicable to other markets with similar market structure such as peer to peer networks and social network sites. The study suggests that the increased adoption of ad-sponsored business model may lead to many de-facto standards in high-technology industries.
When Do Online Consumer Reviews Matter? Evidence from the Video Game Industry
We examine conditions under which online consumer reviews influence product demand. Consumers use online reviews to reduce quality uncertainty. When such information is not readily available from other channels, we expect their reliance on online reviews to increase. Thus we hypothesize that online reviews are more effective for products with low popularity. In addition, as users of the online review systems are Internet surfers, we hypothesize that products that have larger online user populations are more likely to be influenced by online reviews. We empirically test these two hypotheses in the context of video games. We first develop a structural model of game demand and apply a differences-in-differences approach to circumvent the potential endogeneity problem caused by unobserved quality signals. We then use this empirical framework to examine the differential effect of online reviews on popular games and less popular games, and on games that can be played online and games that can only be played offline. We find support for both hypotheses. In addition, we find the presence of direct network effects in this industry---the number of reviews is more influential for games that can be played online. Our results suggest that online word of mouth (WOM) complements offline WOM, and its potential influence on product demand is moderated by the availability of other information channels and the Internet-savviness of the buyers. We discuss the implications of these results in the age of the "long tail."
