In the previous lectures we both discussed entry barriers as well as the characteristics of platform based-markets. If we look at previous literature, most papers focus on how resources and capabilities possessed by an entry enfant affect its post-entry performance in traditional markets (Helfat and Lieberman, 2002). However, as platforms are becoming more and more important, it is interesting to zoom in on how succeeding as an entry differs between traditional markets and platform-based markets. I believe that different factors are applicable when looking to the success of entrants in platform-based markets.
First of all, platform-based markets consist of multiple parties who conduct transactions. This is, as discussed in the lecture, referred to as a two- or multisided platform. Platform providers must get both consumers and developers of complementary applications on board in order to succeed (Liebowitz, 2002). This is a key difference compared to traditional markets and an important consideration when it comes to entry success.
If we look at traditional markets, prior literature shows that quality is one of the main drivers of success for entrants on the long term (Liebowitz and Margolis, 1994; Rangan and Adner, 2001; Liebowitz, 2002; Suárez and Lanzolla, 2007; Tellis, Yin, and Niraj, 2009). More specifically, Rangan and Adner (2001) states that ‘innovative late entrants can outsell incumbents’. I believe this driver also holds for platform-based markets, but in a slightly different way. This is confirmed by the study of Evans (2003), who concluded that early entrants in those markets do not always retain their leadership position on the long term. Also the study of Tellis and Niraj (2009) find evidence that quality is dominant over entry-date.
Besides quality, also the timing of the entry is found to be very important in traditional markets. Especially when the market is very competitive and dynamic, the decision to enter the market should be timed to balance the risks of premature entry against the missed opportunity of late entry (Lilien and Yoon, 1990). Looking at platform-based markets, it sounds reasonable that timing is also essential. As most of the users of the platforms experience high switching and multi-homing costs, the risk of a late entry is high. On the other hand, an earlier entry can result in failing to reach the critical mass because people are not yet ready for it.
From a platform-based market perspective, a lot of other more specific factors come into play. The most important difference with a traditional market is the existence of indirect and direct networking effects. This phenomenon has large consequences for market entries. Firms within the market are relying on the interdependence between consumer demands and demands for their associated applications. Prior literature theorized that because of those network effects, platforms with a small market dominance on both sides have a relatively big advantage. They state that a dominant player is more likely to attract additional users and application developers. As a result, it might become a monopolist even if its quality is not superior. If we reverse this reasoning, this means that even when the quality of the entry is superior, the entry is likely to fail due to network effects. A new social platform will have a hard time competing with Facebook, even when its quality is higher.
Besides networking effects, also consumer expectations are identified as a predictor of success for platform-based market entries. Katz and Shapiro (1994) and Farrell and Klemperer (2007) explains that expectation of consumers of future market share of the platform are critical regarding the market entry. In traditional markets, consumers are more focused on relatively short-term usage. Potential platform users on the other hand are more dependent on market prospects of the platform.
I believe there are several factors when it comes to success of entries which both holds for traditional as well as for platform-based markets. As a conclusion, I believe that quality and market timing are primarily important when entering a traditional market. These factors are also important for platform-based markets entries, but they also have to deal with additional, even more important factors. The most critical ones are networking effects (direct and indirect) and consumer expectations.
I am very curious what you guys think of the abovementioned success factors. Please feel free to share your thoughts in the comments!
References:
Farrell, J., & Klemperer, P. (2007). Coordination and lock-in: Competition with switching costs and network effects. Handbook of industrial organization, 3, 1967-2072.
Helfat, C. E., & Lieberman, M. B. (2002). The birth of capabilities: market entry and the importance of pre‐history. Industrial and corporate change, 11(4), 725-760.
Katz, M. L., & Shapiro, C. (1994). Systems competition and network effects. The journal of economic perspectives, 8(2), 93-115.
Liebowitz, S. J., & Margolis, S. E. (1994). Network externality: An uncommon tragedy. The Journal of Economic Perspectives, 8(2), 133-150.
Liebowitz, S. (2002). Rethinking the networked economy: The true forces driving the digital marketplace. AMACOM Div. American Mgmt Assn, Dallas.
Lilien, G. L., & Yoon, E. (1990). The timing of competitive market entry: An exploratory study of new industrial products. Management science, 36(5), 568-585.
Suarez, F. F., & Lanzolla, G. (2007). The role of environmental dynamics in building a first mover advantage theory. Academy of Management Review, 32(2), 377-392.
Tellis, G. J., Yin, E., & Niraj, R. (2009). Does quality win? Network effects versus quality in high-tech markets. Journal of Marketing Research, 46(2), 135-149.
Zhu, F., & Iansiti, M. (2012). Entry into platform‐based markets. Strategic Management Journal, 33(1), 88-106.
