Competing with Big Data
CentER Discussion Paper 2017-007
51 Pages Posted: 16 Feb 2017
Date Written: February 16, 2017
This paper studies competition in data-driven markets, that is, markets where the cost of quality production is decreasing in the amount of machine-generated data about user preferences or characteristics, which is an inseparable byproduct of using services offered in such markets. This gives rise to data-driven indirect network effects. We construct a dynamic model of R&D competition, where duopolists repeatedly determine their innovation investments, and show that such markets tip under very mild conditions, moving towards monopoly. In a tipped market, innovation incentives both for the dominant firm and for competitors are small. We also show under which conditions a dominant firm in one market can leverage its position to a connected market, thereby initiating a domino effect. We show that market tipping can be avoided if competitors share their user information.
Keywords: Big Data, Datafication, Data-driven Indirect Network Effects, Dynamic Competition
JEL Classification: D43, D92, L13, L43, L86
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