Friends in High Places: Demand Spillovers and Competition on Digital Platforms

Abstract

By lowering transaction costs, digital platforms may foster complementary dynamics across offerings that compete in other settings. I study the effect of peer expansion on provider performance and consider when demand spillovers outweigh substitution across providers on a digital platform. Using data from the Spotify music streaming platform, I find that, on average, peer expansion improves focal provider performance on the platform, however provider characteristics moderate this effect. Expansion by a popular peer generates demand spillovers that overcome the effect of substitution and improve focal provider performance, while expansion by a less popular peer does not generate sufficient spillovers to overcome the negative effects of substitution. I explore how platform recommendations magnify spillovers and consider the strategic implications of these market dynamics. In doing so, I highlight that digital platforms alter how firms compete and present evidence that, on some digital platforms, firms may face less intense head-to-head competition from more popular peers.

Keywords: platforms, competition, spillovers, digital markets, media economics