Competing with Complementors: An Empirical Look at Amazon.com

Feng  Zhu; Qihong  Liu

Article | Strategic Management Journal | October 2018

Competing with Complementors: An Empirical Look at Amazon.com

by Feng Zhu and Qihong Liu

Abstract

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.

Keywords: Competition; Market Platforms; Competitive Strategy;

Format: Print

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Citation:

Zhu, Feng, and Qihong Liu. "Competing with Complementors: An Empirical Look at Amazon.com." Strategic Management Journal 39, no. 10 (October 2018): 2618–2642.

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.

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:

• network effects, in which users attract more users
• 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.

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Competing with Complementors: An Empirical Look at Amazon.com

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