Entry into Platform-Based Markets

40 Pages Posted: 2 Mar 2009

See all articles by Feng Zhu

Feng Zhu

Harvard University - Harvard Business School

Marco Iansiti

Harvard University - Business School (HBS)

Date Written: February 27, 2009

Abstract

This paper seeks to understand when an entrant with superior quality can successfully enter a platform-based market. We analyze a model where an entrant platform with superior quality competes with an incumbent platform. We find that the entrant's success depends critically on the strength of indirect network effects and the consumers' discount factor of future applications. Contrary to the popular belief that an entrant's quality advantage needs to be sufficiently high to overcome the incumbent's installed-base advantage in such markets, we find that under certain conditions, an entrant with a small quality advantage can gain market share over time when competing with an incumbent with a huge installed-base advantage. To demonstrate the model's applicability, we examine the entry of the Xbox console into the video game industry. We find that Xbox has a small quality advantage over the incumbent, PlayStation 2, and the strength of indirect network effects and the consumers' discount factor in this market are such that PlayStation 2's huge installed-base advantage is unsustainable.

Keywords: platform-based markets, winner-take-all, platform competition, indirect network effects, video game industry

JEL Classification: L13, M21, O33

Suggested Citation

Zhu, Feng and Iansiti, Marco, Entry into Platform-Based Markets (February 27, 2009). Atlanta Competitive Advantage Conference Paper. Available at SSRN: https://ssrn.com/abstract=1350233 or http://dx.doi.org/10.2139/ssrn.1350233

Feng Zhu (Contact Author)

Harvard University - Harvard Business School ( email )

Soldiers Field Road
Morgan 431
Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=14938

Marco Iansiti

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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