Growth versus Competition in Growing Digital Markets: Evidence from Amazon Prime's Effects on Competitors

Abstract

Competition and the relationship among firms in a digital marketplace is a nuanced aspect. When one firm increases their attractiveness, we intuit this would take business away and hurt other firms from increased competition. On the other hand, in growing digital markets, it may also attract market activity of novice consumers when they are still unsure about market participation. In new information systems markets, such as freelance labor markets, sharing economy, or delivery apps, there are various barriers-to-entry like learning how the market operates, comfort with safety or quality, or startup costs that may limit consumer activity. In this paper, we explore such issues by analyzing an example market where a large firm's actions may have both competitive and spillover effects on competitors. Specifically, we study how consumer experience at Amazon.com may have increased their comfort with the broader online retail market. We study the event of Amazon Prime adoption, a paid membership which reduces transaction costs at Amazon, using a panel of bank card transactions. Surprisingly, we find that adopters increase their non-Amazon spending after Prime adoption. However, this increase occurs only among novice users of the digital market; the more experienced adopters indeed decrease their non-Amazon spending and consolidate their spending at Amazon. Adopters demonstrate additional evidence of increased market comfort: stronger increases in apparel merchants than in electronics, and increased rates of online returns and variety of stores purchased from. We find no significant evidence of pre-trends or timing self-selection confounders. As a possible source explaining the increased comfort, we do observe that novices whose Amazon spending increases more after Prime are also those with larger increases in their non-Amazon spending. Through these analyses, we illustrate nuances of competition in growing digital markets, highlighting policy and regulation insights on how large firms can have positive spillovers, particularly on novice consumers.

Keywords: demand spillover effects, online competition, digital markets, e-commerce, agglomeration