Competing with Big Data

51 Pages Posted: 16 Feb 2017  

Jens Prufer

Tilburg University - CentER; Tilburg University - Department of Economics; Tilburg University - Law and Economics Center (TILEC)

Christoph Schottmüller

University of Copenhagen - Department of Economics; Tilburg Law and Economics Center (TILEC)

Date Written: February 16, 2017

Abstract

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

Suggested Citation

Prufer, Jens and Schottmüller, Christoph, Competing with Big Data (February 16, 2017). Tilburg Law School Research Paper No. 06/2017; TILEC Discussion Paper No. 2017-006; CentER Discussion Paper 2017-007. Available at SSRN: https://ssrn.com/abstract=2918726 or http://dx.doi.org/10.2139/ssrn.2918726

Jens Prufer (Contact Author)

Tilburg University - CentER ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Christoph Schottmüller

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

HOME PAGE: http://www.schottmueller.me

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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