Network intensity and platform persistence

Network Intensity and Platform Persistence David P. McIntyre, Providence College Asda Chintakananda, NIDA Business School INTRODUCTION Despite significant progress in conceptualizing effective strategies in platform-mediated... [ view full abstract ]

Network Intensity and Platform Persistence
David P. McIntyre, Providence College
Asda Chintakananda, NIDA Business School

INTRODUCTION
Despite significant progress in conceptualizing effective strategies in platform-mediated markets (e.g. Eisenmann, 2006; Parker and Van Alstyne, 2005; Schilling, 1998; Tanriverdi and Lee, 2008), key questions at the intersection of strategy, network effects, and platforms remain unresolved. Specifically, past research has largely focused its attention to unique situations in which the momentum of network effects and positive feedback leads to a winner-take-all scenario, where all remaining rivals are driven away from the market (e.g., Lin and Kulatilaka, 2007; Suárez and Utterback, 1995). However, anecdotal evidence has shown that even in the absence of radical technological change or product innovation, many dominant platform firms eventually lose market share, and in some cases, their entire platform, to new entrants and rivals (Zhu and Iansiti, 2012).
This theoretical oversight may result from the fact that previous work on platform-mediated networks has largely ignored the impact of varying intensity in network effects. Platforms may exhibit varying degrees of network intensity (McIntyre and Subramanian, 2009) which provide firms with different incentives to develop or maintain an installed base of users. For example, in social networks, the intensity of network effects is high, as consumers are more likely to account for the total size of an existing network when adopting a platform. When the ability to interact with the largest available installed base is vital, the market will tend to converge on a single, dominant platform. Yet in other contexts, such as credit cards, ridesharing, or HMO networks, consumers may be less concerned with the total size of the network than with the participation of a smaller network of key contributors. Such variation may allow for the relatively stable co-existence of several “winners”, without the emergence of a single dominant platform. Additionally, extant research has largely overlooked competitive dynamics in platforms once a dominant incumbent has locked-in the market, implicitly assuming that competitive rivalry ceases to exist. This assumption ignores the possibility that firms within the same industry may continue to pose threats to one another based not only on their market commonality, but on their resource similarity (Chen, 1996). Thus, firms that have achieved winner-take-all status may continue to have their dominant platform threatened by competitors and new entrants.
In light of these observations, we investigate the joint influence of network intensity and network rivalry by addressing the following research question: How do network intensity and competitive dynamics influence the persistence of firms’ dominance in a platform-mediated market? First, we draw upon the network effects and real options literatures to describe how varying degrees of network intensity can provide firms with growth potential that may be attractive for network rivals to enter or remain in the same market. We then draw upon the competitive dynamics literature to develop four scenarios whereby different levels of network rivalry interact with network intensity to shape the firm’s ability to persist in its platform dominance after it has achieved “winner-take-all” status.
This research contributes to the literature on network effects by illustrating the potential for firms to maintain or lose their platform dominance based on the interaction of network intensity and network rivalry. It also extends previous research by providing a large-scale empirical analysis of how firms in platform markets compete for dominance, whereas previous research has focused largely on narrative approaches or case studies. This work also contributes to the competitive dynamics literature by clarifying the competitive dynamics of firms in platform-mediated markets, which may be unique from those in other settings. Finally, this research also provides implications for managers by providing a better understanding of the strategic advantages and disadvantages that firms may face in developing optimal strategies around networks and platforms.

RESEARCH METHODOLOGY
Data sources
Our primary source of data is the Compustat Global database between 1990 and 2010, which encompassed 2655 unique firms and 25,547 firm/year observations.
Variables
Platform persistence. The ability of firms to maintain their platform will be measured by the firm’s market share and decay rate.
Network intensity. Firms with SIC codes 3571 to 7376 will be emphasized, as firms in these sectors have been characterized by previous research as being prone to network effects and the emergence of platforms. To determine the degree of network intensity in each industry, each will be rated along several dimensions of network intensity.
Network rivalry. Network rivalry will be measured using the Herfindahl index.
Control Variables. Our control variables will include a variety of industry-level variables such as industry sales and industry growth. We also plan to include measures of uncertainty (variance in industry sales) and irreversibility (minimum capital required for industry entry) to assess industry-level option values.
Empirical model and results
A logit model will be used to empirically assess our hypothesis. We anticipate that data gathering will be complete initial models analyzed by August 2016.
DISCUSSION AND CONCLUSION
This research contributes to literature at the nexus of strategy, network effects and platforms by illustrating that there is variation in the persistence of platforms across industries, and thereby in dominant firms’ likelihood of maintaining their position. Specifically, we demonstrate that the interaction of network intensity and network rivalry may significantly impact industry dynamics and the persistence of platforms. This research also contributes to the literature by clarifying how the competitive dynamics of firms in platform-mediated markets may differ from those in other markets.