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Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

  • Oren Reshef
American Economic Journal: Microeconomics
vol. 15, no. 4, November 2023
(pp. 183-207)
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Abstract

Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms' responses.

Citation

Reshef, Oren. 2023. "Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets." American Economic Journal: Microeconomics, 15 (4): 183-207. DOI: 10.1257/mic.20220055

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • D85 Network Formation and Analysis: Theory
  • L14 Transactional Relationships; Contracts and Reputation; Networks
  • L15 Information and Product Quality; Standardization and Compatibility
  • L84 Personal, Professional, and Business Services
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