Entry into Platform-based Markets

Feng  Zhu; Marco   Iansiti

Article | Strategic Management Journal

Entry into Platform-based Markets

Abstract

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.

Keywords: platform-based markets; winnter-take-all; first-mover advantage; indirect network effects; video game industry; Quality; Network Effects; Market Entry and Exit; Technology Platform; Motion Pictures and Video Industry;

Format: Print

19 pages

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Citation:

Zhu, Feng, and Marco Iansiti. "Entry into Platform-based Markets." Strategic Management Journal 33, no. 1 (January 2012): 88–106.

As an intermediary improves trust between two sides of its market to facilitate matching and transactions, it faces an increased risk of disintermediation—with sufficient trust, the two sides may circumvent the intermediary to avoid the intermediary’s fees. We investigate the relationship between increased trust and disintermediation by leveraging a randomized control trial on a major online freelance marketplace. Our results show that enhanced trust increases the chance for hiring high-quality freelancers. When the trust level is sufficiently high, however, it also increases disintermediation, which offsets the revenue gains from the increase in hiring high-quality freelancers. We also identify heterogeneity across clients and freelancers in their tendencies to disintermediate.

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Entry into Platform-based Markets

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