Repositioning and Cost-Cutting: The Impact of Competition on Platform Strategies

Self Cite

201

125

Research Summary This paper studies the impact of platform‐owner entry threat on complementors in platform‐based markets. We examine how app developers on the Android mobile platform adjust innovation efforts (rate and direction) and value‐capture strategies in response to the threat of Google's entry into their markets. We find that after Google's entry threat increases, affected developers reduce innovation and raise the prices for the affected apps. However, their incentives to innovate are not completely suppressed; rather, they shift innovation to unaffected and new apps. Given that many apps already offer similar features, Google's entry threat may thus reduce wasteful development efforts. We discuss the implications of these results for platform owners, complementors, and policy makers. Managerial Summary We examine one prevalent source of conflict: platform owners' entry into complementary product spaces. We show that app developers on Google's Android system are strategic and nimble actors. They respond to the threat of Google's entry by adjusting both value‐creation and value‐capture strategies. We also show that platform owners could use direct entry to shape innovation directions and encourage variety of complements. Overall, on the one hand, Google's entry may have pushed complementors into other areas (which might be less lucrative) and strengthened its position in the mobile market. On the other hand, the entry may have reduced wasteful production efforts in the development of redundant applications. The overall welfare implication is thus ambiguous.

Section: Theory and Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 96%

Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

Wen

Zhu

2019

Self Cite

201

125

“…This insight is further elaborated in Menon and Dennis (), who analyze the interaction between an incumbent (innovator) and an entrant (follower) involving repositioning costs. We extend this insight in a different yet important setting, where the incumbent incurs repositioning costs after a competitive entry (Seamans & Zhu, ; Wang & Shaver, ).…”

Section: Biased Entrantmentioning

confidence: 76%

“…Suppose the incumbent (entrant) has a sister incumbent (brother entrant) owned by the same parent corporation. If the sister incumbent has experience with the entry of the brother entrant, then the incumbent's own repositioning costs can be affected as a result of learning from prior repositioning across sibling units (Alcácer et al, ; Alcácer & Zhao, ; Kalnins & Mayer, ; Seamans & Zhu, ). In such a context, our analysis indicates that changed repositioning costs can lead to a lower or higher performance for the incumbent, and a greater or smaller benefit for the entrant than for the incumbent; see Lemma and Corollary .…”

Section: Discussionmentioning

confidence: 99%

“…The repositioning ability of an incumbent may be low for a variety of reasons such as existing commitments. Examples here include Apple's iPhone's commitment to using its own operating system and distribution channel (Ghemawat, ; Hill & Rothaermel, ; Pacheco‐De‐Almeida, Henderson, & Cool, ), a newspaper business's inability to reposition when Craigslist enters the local market (Seamans & Zhu, ), and Loblaw Companies Limited, a major grocery chain in Canada, that built superstores before Walmart entered the market, and that could not efficiently switch to a small‐store format (Besanko et al, ).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Incumbent repositioning with decision biases

2019

Research Summary Incumbent firms often reposition themselves in response to entrants, but when doing so they incur repositioning costs. Incumbent repositioning costs and the associated decision biases have been identified in the economics, operations, and strategy literatures as critical aspects of the competitive interactions between incumbents and entrants, but they have received limited attention in game‐theoretic treatments at the strategy level. To fill this gap, we develop a strategic mental model to analytically characterize the impacts of repositioning costs and decision biases on firms' equilibrium strategies and profits. Including these costs and biases changes, the nature of strategic dynamics as well as introduces new implications for strategic choice. Managerial Summary Our analysis shows that although biases by themselves are unequivocally harmful for firms, both the entrant and incumbent can earn more when they are biased than when neither one is. In particular, when an entrant is biased in estimating an incumbent's repositioning ability, this unequivocally reduces its own performance, if the incumbent is aware of the entrant's bias and has correctly assessed it. In a similar vein, when an incumbent is biased in its estimation of the entrant, this hurts the incumbent. However, both the entrant and the incumbent can earn more than they would in a setting where both firms are unbiased. Furthermore, the incumbent is not necessarily better off by being less biased—that is, aware of but with an inaccurate assessment of entrant bias.

Responses to rival exit: Product variety, market expansion, and preexisting market structure

Ren

Cui

2018

Research Summary This study investigates incumbent responses to a main rival's exit. We argue that long‐time rivals have developed an equilibrium by offering a mix of overlapping and unique products and by choosing geographic proximity to each other. A rival's exit, however, disrupts this equilibrium and motivates surviving firms to expand in both product and geographic spaces to seek a new equilibrium. Using data from all U.S. Best Buy stores before and after the exit of Circuit City, we find that Best Buy uses product variety expansion as its major response in markets where Circuit City was colocated, but it more often responds by opening new stores in non‐colocated markets. Regardless of preexisting market structures, the magnitude of product variety expansion decreases with the opening of new stores. Managerial Summary How do surviving firms respond to a major rival's exit? By studying Best Buy's responses to Circuit City's withdrawal, we find the survivor expands in both product space (increasing product variety) and geographic space (opening new stores), due to two motives. First, the survivor strives to fill in “holes” left in the market. Second, the survivor experiences uncertainty in the postexit world wherein its reference point is gone, threat of potential entry looms, and it lacks information about new entrants. Thus, it must deter potential entry ex ante by preempting many prime product and geographic locations. Best Buy also responds according to preexisting market structures, primarily through product variety expansion in markets wherein Circuit City was colocated and through opening new stores in non‐colocated markets.