A Videoconference Research Seminar

Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations
by Feng ZHU

Abstract

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.

About the speaker

Feng Zhu is a PhD candidate in Science, Technology and Management at Harvard University. His research interests include multi-sided markets, business value of information technology, intellectual property protection, and technology adoption and diffusion. Feng received his B.A. in Economics, Mathematics and with highest honors in Computer Science from Williams College, and his S.M. in Computer Science from Harvard University. He is a member of Phi Beta Kappa and Sigma Xi Research Society.