Dynamics of platform-based markets

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Dynamics of platform-based markets
Authors: Feng Zhu [edit item]
Citation: Harvard University  : . 2008. United States, Massachusetts.
Publication type: Thesis
Peer-reviewed: Yes
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Link(s): Paper link
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Dynamics of platform-based markets is a publication by Feng Zhu.


[edit] Abstract

Platform-based markets are prevalent in today's economy. Understanding the driver of platform success is of critical importance for platform providers. In this dissertation, I first develop a dynamic model to characterize conditions under which different factors drive the success of a platform, and then use the theoretical framework to analyze market-level data from the video game industry. I find that game players' marginal utility decreases rapidly with additional games after the number of games reaches a certain point, and quality is more influential than indirect network effects in driving the success of video game consoles. I also use individual-level data from Chinese Wikipedia to examine contributors' incentives to contribute. I take advantage of China's block of Chinese Wikipedia in mainland China in 2005 as a natural experiment to establish the causal relationship between contributors' incentives to contribute and the number of the beneficiaries of their contributions. I find that while on average contributors' incentives to contribute drop significantly after the block, the contribution levels of those contributors with small collaboration networks do not decrease after the block. In addition, these contributors join Wikipedia significantly earlier than the average contributor. The results suggest that other market factors such as altruism could be more influential than indirect network effects in encouraging user participation in the early stage of Chinese Wikipedia. The overall research casts doubt on the popular belief that indirect network effects are the primary force driving platform success and suggests that in many cases, other market forces could be dominant. Late movers could therefore take over market leaderships by exploiting these market forces.

[edit] Research questions

"In this dissertation, I first develop a dynamic model of platform competition and show that the driver of platform success depends critically on how consumer utility changes with the number of complements on the other side of the market. I outline the conditions under which platform success can be driven by market forces other than indirect network effects. The dynamic model also illustrates how individual consumer utility from adopting each platform aggregates to market-level adoption data and in turn, forms a basis for empirical investigation using market-level data. Next, I use the dynamic framework to empirically estimate consumers' utility functions using market-level data from the video game industry, a textbook example of platform-based markets. I analyze the competition between PlayStation 2 and Xbox between 2001 and 2005. In contrast with the popular belief that indirect network effects in this market are strong and drive the success of the consoles, I find that the strength of indirect network effects is not great. In fact, game players' marginal utility decreases rapidly with additional games after the number of games reaches a certain point. Combining the empirical estimates and the dynamic model, I find that in this market, quality is more critical than indirect network effects in driving console success. As Xbox is found to have a small quality advantage over PlayStation 2, my results help explain the successful entry of Xbox into this market. I also empirically estimate the strength of indirect network effects between contributors and readers on Chinese Wikipedia. Unlike the video game industry, Chinese Wikipedia provides individual-level data. Hence I am able to investigate how contributors' incentives to contribute change with the number of beneficiaries directly and how such interdependence varies among contributors. I take advantage of China's block of Chinese Wikipedia in mainland China as a natural experiment to address potential endogeneity issues."

Research details

Topics: Contributor motivation [edit item]
Domains: Economics [edit item]
Theory type: Design and action [edit item]
Wikipedia coverage: Sample data [edit item]
Theories: "These case studies indicate that existing theories fail to explain the dynamics of

many platform-based markets. They also suggest that other market forces can be are more influential than indirect network effects in driving the success of platforms. Empirical studies of platform-based markets do not help reconcile the mismatches between theoretical literature and empirical observations. Most empirical studies focus exclusively on detecting the existence of indirect network effects in these platformbased markets. They do not offer any insights into the dynamics of these markets (such as how late movers can survive in such markets and whether the markets are winner-takes-all). While it is theoretically possible to compute all equilibria when <p > <p*, this approach can take a prohibitive amount of time when the number of periods is large. For example, if every period involves two solutions (i.e., two possible paths along which the market could evolve) and the life expectancy of the platforms is 100 periods, there could be a maximum of 2100 paths or approximately 1030 possible paths. To tackle this problem of dimensionality, researchers often impose additional constraints to limit the number of possible equilibria. The theoretical analysis helps establish the linkage between observed market dynamics and consumers' utility functions. In the next chapter, I use the theoretical framework to empirically estimate utility functions of game players in the video game industry. According to the theoretical analysis in Chapter 2, I need to estimate the strength of indirect network effects, e, and consumer discount factor of future applications, (f), to understand the driver of console success and gain insights into game players' utility functions. Second, my theoretical model assumes that platforms are priced at the same level. The pricing strategies of Microsoft and Sony fit this assumption well. Figure 3.1 shows price differences between Xbox and PlayStation 2 consoles since the entry of Xbox in November 2001. My theoretical model predicts that under two scenarios an entrant with superior quality could be successful: 1) the strength of indirect network effects and consumers' discount factor are within the range where the market dynamics are quality driven, and 2) the discount factor is sufficiently large and consumers hold favorable expectations toward the entrant. In the video game console market, the equilibrium did not emerge rapidly. Thus, the second scenario is less likely. I therefore hypothesize that in this market, market dynamics are driven by platform quality. According to my theoretical model, I expect P\ to be 1. The quality ratio, F, can be obtained as exp(/32). As I do not observe y and Fjt in each period, I include year dummies and a holiday dummy (which equals 1 when the month is November or December and 0 otherwise) to control for their variations over time." [edit item]

Research design: Experiment [edit item]
Data source: Experiment responses, Wikipedia pages [edit item]
Collected data time dimension: Longitudinal [edit item]
Unit of analysis: Article, Edit, User [edit item]
Wikipedia data extraction: Live Wikipedia [edit item]
Wikipedia page type: Article, User, User:talk [edit item]
Wikipedia language: Chinese [edit item]

[edit] Conclusion

"I find that while on average contributors' incentives to contribute drop significantly after the block, the contribution levels of those contributors with small collaboration networks do not decrease after the block. In addition, these contributors join Wikipedia significantly earlier than the average contributor. My dissertation makes a number of contributions. First, it casts doubt on the traditional wisdom that indirect network effects are the primary force driving platform success. Empirical findings from both the video game industry and Chinese Wikipedia suggest that many other market forces, such as quality and altruism, are more important, especially in the early stage of the platform development. A late mover may take over the leadership if it obtains a reasonable size on each side of the market and focuses on market forces other than indirect network effects. The dissertation also makes several contributions to the literature on platformbased markets and private provision of public goods. Chapter 2 provides one of the first dynamic models of platform-based markets.1 The results from my dynamic model suggest that one cannot make a priori statements about market outcomes without empirical investigations. In addition, contrary to the popular belief that indirect network effects protect incumbents and are the source of market inefficiency, my results indicate that under certain conditions, indirect network effects could enhance entrants' quality advantage and market outcomes could actually be more efficient with stronger indirect network effects. Chapter 3 contributes to the empirical literature on indirect network effects. Researchers have examined indirect network effects in the context of digital televisions, home video cassette recorders, DVD and Divx players, yellow pages, personal digital assistants and home video games. Table 5.1 summarizes these earlier empirical studies. All of these studies, with the exception of Gandal et al. (2000) and Park (2004), rely on static frameworks. An implicit assumption of these static approaches is that both consumers and application developers act myopically. Gandal et al. (2000) analyze dynamic demand for a market with a homogeneous product (DVD players), while I study a market with two competing products. Park (2004) analyzes the competition between VHS and Betamax. As Park does not have data on the number of movie titles available for each technology, he essentially models indirect network effects as if they were direct: consumer utility is a function of the installed base of consumers rather than movie variety. My study extends the approaches in Gandal et al. (2000) and Park (2004), and considers forward-looking behavior in a market with differentiated products. My findings suggest that ignoring consumers' forward-looking behavior leads to overestimation of the strength of indirect network effects. In addition, most existing empirical studies focus on detecting the presence of indirect network effects in specific markets. As the presence of indirect network effects in most of these markets is readily apparent, few managerial implications arise from merely proving their existence. My primary interest in conducting the empirical analysis is to illustrate how to combine the estimates with the dynamic model to understand the evolution of specific markets. Platform providers could apply the same approach to new situations such as search engines and computer industries to gain insights into market outcomes, and design optimal strategies accordingly. Chapter 4 provides a unifying framework that combines the literature on public goods and the literature on platform-based markets to understand private provision of public goods. The framework is the first to build indirect network effects into individuals' utilities from contributing to public goods. In my model, for a given level of contribution, the larger the group, the greater marginal private benefit a contributor derives. The idea that contributors receive private benefits from contributing has been suggested numerous times in the literature (e.g., Becker 1974; Rege 2004; Rege and Telle 2004; Carman 2006). A number of recent studies on open source communities and online reviews also find that contributors indeed derive utility from helping others and gaining respect (e.g., Lerner and Tirole 2002; Lakhani and von Hippel 2003; Dellarocas and Narayan 2006; Rashid et al. 2006; Ren et al. forthcoming). Surprisingly, theoretical studies related to group size have not considered these indirect network effects. While a number of studies have introduced "warm glow" to capture the joy of giving (e.g., Andreoni 1989; Ribar and Wilhelm 2002), the warmglow motive is often assumed to be independent of group size. I show that explicitly incorporating indirect network effects could overturn the inverse relationship between group size and incentives to contribute found in prior theoretical models. I also offer the first empirical test that uses publicly-available individual-level data to examine the relationship between incentives to contribute and group size. The majority of previous studies are based on experimental data and the only few studies based on aggregate-level field data suffer from endogeneity concerns. My study takes advantage of China's block of Chinese Wikipedia in mainland China as a natural experiment to address potential endogeneity issues, and hence establishes a clear causal relationship between group size and incentives to contribute. The empirical results provide strong support for my theoretical model."

[edit] Comments


Further notes[edit]

Facts about "Dynamics of platform-based markets"RDF feed
AbstractPlatform-based markets are prevalent in toPlatform-based markets are prevalent in today's economy. Understanding the driver of platform success is of critical importance for platform providers. In this dissertation, I first develop a dynamic model to characterize conditions under which different factors drive the success of a platform, and then use the theoretical framework to analyze market-level data from the video game industry. I find that game players' marginal utility decreases rapidly with additional games after the number of games reaches a certain point, and quality is more influential than indirect network effects in driving the success of video game consoles. I also use individual-level data from Chinese Wikipedia to examine contributors' incentives to contribute. I take advantage of China's block of Chinese Wikipedia in mainland China in 2005 as a natural experiment to establish the causal relationship between contributors' incentives to contribute and the number of the beneficiaries of their contributions. I find that while on average contributors' incentives to contribute drop significantly after the block, the contribution levels of those contributors with small collaboration networks do not decrease after the block. In addition, these contributors join Wikipedia significantly earlier than the average contributor. The results suggest that other market factors such as altruism could be more influential than indirect network effects in encouraging user participation in the early stage of Chinese Wikipedia. The overall research casts doubt on the popular belief that indirect network effects are the primary force driving platform success and suggests that in many cases, other market forces could be dominant. Late movers could therefore take over market leaderships by exploiting these market forces.erships by exploiting these market forces.
Added by wikilit teamAdded on initial load +
Collected data time dimensionLongitudinal +
ConclusionI find that while

on average contributors'I find that while on average contributors' incentives to contribute drop significantly after the block, the contribution levels of those contributors with small collaboration networks do not decrease after the block. In addition, these contributors join Wikipedia significantly earlier than the average contributor. My dissertation makes a number of contributions. First, it casts doubt on the traditional wisdom that indirect network effects are the primary force driving platform success. Empirical findings from both the video game industry and Chinese Wikipedia suggest that many other market forces, such as quality and altruism, are more important, especially in the early stage of the platform development. A late mover may take over the leadership if it obtains a reasonable size on each side of the market and focuses on market forces other than indirect network effects. The dissertation also makes several contributions to the literature on platformbased markets and private provision of public goods. Chapter 2 provides one of the first dynamic models of platform-based markets.1 The results from my dynamic model suggest that one cannot make a priori statements about market outcomes without empirical investigations. In addition, contrary to the popular belief that indirect network effects protect incumbents and are the source of market inefficiency, my results indicate that under certain conditions, indirect network effects could enhance entrants' quality advantage and market outcomes could actually be more efficient with stronger indirect network effects. Chapter 3 contributes to the empirical literature on indirect network effects. Researchers have examined indirect network effects in the context of digital televisions, home video cassette recorders, DVD and Divx players, yellow pages, personal digital assistants and home video games. Table 5.1 summarizes these earlier empirical studies. All of these studies, with the exception of Gandal et al. (2000) and Park (2004), rely on static frameworks. An implicit assumption of these static approaches is that both consumers and application developers act myopically. Gandal et al. (2000) analyze dynamic demand for a market with a homogeneous product (DVD players), while I study a market with two competing products. Park (2004) analyzes the competition between VHS and Betamax. As Park does not have data on the number of movie titles available for each technology, he essentially models indirect network effects as if they were direct: consumer utility is a function of the installed base of consumers rather than movie variety. My study extends the approaches in Gandal et al. (2000) and Park (2004), and considers forward-looking behavior in a market with differentiated products. My findings suggest that ignoring consumers' forward-looking behavior leads to overestimation of the strength of indirect network effects. In addition, most existing empirical studies focus on detecting the presence of indirect network effects in specific markets. As the presence of indirect network effects in most of these markets is readily apparent, few managerial implications arise from merely proving their existence. My primary interest in conducting the empirical analysis is to illustrate how to combine the estimates with the dynamic model to understand the evolution of specific markets. Platform providers could apply the same approach to new situations such as search engines and computer industries to gain insights into market outcomes, and design optimal strategies accordingly. Chapter 4 provides a unifying framework that combines the literature on public goods and the literature on platform-based markets to understand private provision of public goods. The framework is the first to build indirect network effects into individuals' utilities from contributing to public goods. In my model, for a given level of contribution, the larger the group, the greater marginal private benefit a contributor derives. The idea that contributors receive private benefits from contributing has been suggested numerous times in the literature (e.g., Becker 1974; Rege 2004; Rege and Telle 2004; Carman 2006). A number of recent studies on open source communities and online reviews also find that contributors indeed derive utility from helping others and gaining respect (e.g., Lerner and Tirole 2002; Lakhani and von Hippel 2003; Dellarocas and Narayan 2006; Rashid et al. 2006; Ren et al. forthcoming). Surprisingly, theoretical studies related to group size have not considered these indirect network effects. While a number of studies have introduced "warm glow" to capture the joy of giving (e.g., Andreoni 1989; Ribar and Wilhelm 2002), the warmglow motive is often assumed to be independent of group size. I show that explicitly incorporating indirect network effects could overturn the inverse relationship between group size and incentives to contribute found in prior theoretical models. I also offer the first empirical test that uses publicly-available individual-level data to examine the relationship between incentives to contribute and group size. The majority of previous studies are based on experimental data and the only few studies based on aggregate-level field data suffer from endogeneity concerns. My study takes advantage of China's block of Chinese Wikipedia in mainland China as a natural experiment to address potential endogeneity issues, and hence establishes a clear causal relationship between group size and incentives to contribute. The empirical

results provide strong support for my theoretical model.e strong support for my theoretical model.
Conference locationUnited States, Massachusetts +
Data sourceExperiment responses + and Wikipedia pages +
Google scholar urlhttp://scholar.google.com/scholar?ie=UTF-8&q=%22Dynamics%2Bof%2Bplatform-based%2Bmarkets%22 +
Has authorFeng Zhu +
Has domainEconomics +
Has topicContributor motivation +
Peer reviewedYes +
Publication typeThesis +
Published inHarvard University +
Research designExperiment +
Research questionsIn this dissertation, I first develop a dyIn this dissertation, I first develop a dynamic model of platform competition and

show that the driver of platform success depends critically on how consumer utility changes with the number of complements on the other side of the market. I outline the conditions under which platform success can be driven by market forces other than indirect network effects. The dynamic model also illustrates how individual consumer utility from adopting each platform aggregates to market-level adoption data and in turn, forms a basis for empirical investigation using market-level data. Next, I use the dynamic framework to empirically estimate consumers' utility functions using market-level data from the video game industry, a textbook example of platform-based markets. I analyze the competition between PlayStation 2 and Xbox between 2001 and 2005. In contrast with the popular belief that indirect network effects in this market are strong and drive the success of the consoles, I find that the strength of indirect network effects is not great. In fact, game players' marginal utility decreases rapidly with additional games after the number of games reaches a certain point. Combining the empirical estimates and the dynamic model, I find that in this market, quality is more critical than indirect network effects in driving console success. As Xbox is found to have a small quality advantage over PlayStation 2, my results help explain the successful entry of Xbox into this market. I also empirically estimate the strength of indirect network effects between contributors and readers on Chinese Wikipedia. Unlike the video game industry, Chinese Wikipedia provides individual-level data. Hence I am able to investigate how contributors' incentives to contribute change with the number of beneficiaries directly and how such interdependence varies among contributors. I take advantage of China's block of Chinese Wikipedia in mainland China as a natural experiment to address potential endogeneity issues.t to address

potential endogeneity issues.
Revid10,741 +
TheoriesThese case studies indicate that existing These case studies indicate that existing theories fail to explain the dynamics of

many platform-based markets. They also suggest that other market forces can be are more influential than indirect network effects in driving the success of platforms. Empirical studies of platform-based markets do not help reconcile the mismatches between theoretical literature and empirical observations. Most empirical studies focus exclusively on detecting the existence of indirect network effects in these platformbased markets. They do not offer any insights into the dynamics of these markets (such as how late movers can survive in such markets and whether the markets are winner-takes-all). While it is theoretically possible to compute all equilibria when <p > <p*, this approach can take a prohibitive amount of time when the number of periods is large. For example, if every period involves two solutions (i.e., two possible paths along which the market could evolve) and the life expectancy of the platforms is 100 periods, there could be a maximum of 2100 paths or approximately 1030 possible paths. To tackle this problem of dimensionality, researchers often impose additional constraints to limit the number of possible equilibria. The theoretical analysis helps establish the linkage between observed market dynamics and consumers' utility functions. In the next chapter, I use the theoretical framework to empirically estimate utility functions of game players in the video game industry. According to the theoretical analysis in Chapter 2, I need to estimate the strength of indirect network effects, e, and consumer discount factor of future applications, (f), to understand the driver of console success and gain insights into game players' utility functions. Second, my theoretical model assumes that platforms are priced at the same level. The pricing strategies of Microsoft and Sony fit this assumption well. Figure 3.1 shows price differences between Xbox and PlayStation 2 consoles since the entry of Xbox in November 2001. My theoretical model predicts that under two scenarios an entrant with superior quality could be successful: 1) the strength of indirect network effects and consumers' discount factor are within the range where the market dynamics are quality driven, and 2) the discount factor is sufficiently large and consumers hold favorable expectations toward the entrant. In the video game console market, the equilibrium did not emerge rapidly. Thus, the second scenario is less likely. I therefore hypothesize that in this market, market dynamics are driven by platform quality. According to my theoretical model, I expect P\ to be 1. The quality ratio, F, can be obtained as exp(/32). As I do not observe y and Fjt in each period, I include year dummies and a holiday dummy (which equals 1 when the month is November or December and 0

otherwise) to control for their variations over time.
to control for their variations over time.
Theory typeDesign and action +
TitleDynamics of platform-based markets
Unit of analysisArticle +, Edit + and User +
Urlhttp://proquest.umi.com/pqdweb?did=1534034141&Fmt=7&clientId=10306&RQT=309&VName=PQD +
Wikipedia coverageSample data +
Wikipedia data extractionLive Wikipedia +
Wikipedia languageChinese +
Wikipedia page typeArticle +, User + and User:talk +
Year2008 +