When Will an Overconfident Entrant in the Two-Sided Market Do More Good than Harm?

Abstract

In business operations, a two-sided platform serves as an intermediary connecting two sets of agents in the two-sided market and new entrants are commonly seen. Due to unfamiliarity with the market, the entrant may be overconfident in estimating consumer’s utility, i.e., overestimating. In addition, an entrant could bring consumers’ attention to the entered field, which forms a market amplification effect. This study considers the market amplification effect and entrant’s overconfidence degree, establishes game-theoretical models for analyzing the entry scenario and compares the results with the monopoly scenario. Three main findings are obtained. First, an overconfident entrant makes both itself and the incumbent overprice, which may explain the increased price of Ele.me and Meituan. Second, the profit of the entrant is not monotonic as the overconfidence degree changes. As the overconfidence degree increases, the entrant’s profit first increase and then decrease. Third, the entrant’s overconfidence benefits both the incumbent and entrant when the overconfidence degree is relatively low and the market amplification effect is relatively high. This finding contributes to explain why optimistic entrepreneurs are popular in the industry.

Keywords: two-sided platforms, platform entry, overestimation, price competition