Defensive Competitive Strategies in Two-Sided Markets: The Example of the Mail Industry

Abstract

This paper outlines and analyzes different competitive strategies for an established platform provider in a two-sided market to defend against various forms of attack. Taking into account the characteristics of two-sided markets, we consider strategies based on product innovation and network effects, process innovation and pricing, multiple platforms, and switching costs. Network effects introduce dynamics that can quickly displace an incumbent platform. However, a platform provider can also use network effects to its advantage, entrenching itself firmly in the market by using appropriate strategies. These strategies are developed theoretically and illustrated by example of the mail industry.

Combating incumbency advantage of network effects: The role of entrant’s decisions and consumer preferences

“…While the population mix of the market and network effects is beyond the control of managers (Bental & Spiegel, 1995), price and quality are important levers in the hands of product managers. Product quality has been identified as a source of durable competitive advantage for new products (Cooper & Kleinschmidt, 1987; Dietl, Grutter, & Lutzenberger, 2009; Lawless & Fisher, 1990) and has been found to imply an aspect of comparison with competing products, thereby influencing ultimate success or failure of the product (Calantone & Di Benedetto, 1988). The effect of product quality on growth is significant even after controlling for the size of the installed base (McIntyre, 2011a) and it positively influences market share of high-tech products (Tellis et al, 2009).…”

“…An emerging strand of literature is focusing on the price and quality decision in markets with network effects (Dietl et al, 2009). It has been found that not only can firms’ pricing strategies strengthen network effects in early stages of product introduction (Ohashi, 2003), but network effects can in turn positively influence the price that firms charge (Chakravarty, Dogan, & Tomlinson, 2006).…”

“…Product price has been found to significantly influence the effectiveness of market entry strategies such that a late entrant can still displace the incumbent by pricing a less distinctive product at a comparatively higher price point (Besharat et al, 2015). An emerging strand of literature is focusing on the price and quality decision in markets with network effects (Dietl et al, 2009). It has been found that not only can firms' pricing strategies strengthen network effects in early stages of product introduction (Ohashi, 2003), but network effects can in turn positively influence the price that firms charge (Chakravarty, Dogan, & Tomlinson, 2006).…”

Looking Beyond Membership: A Simulation Study of Market-entry Strategies for Two-sided Platforms under Competition

“…While two-sided markets have existed for a long time, the economic importance of two-sided digital platforms has increased dramatically, with more and more platforms emerging, including many high-value brands (Dietl, Grütter, & Lutzenberger, 2009;Interbrand, 2020;Wan, Cenamor, Parker, & Van Alstyne, 2017). Naturally, the existence of multiple similar platforms intensifies competition and it becomes more difficult to enter the market and acquire the necessary number of users to survive.…”