IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v63y2017i10p3438-3458.html
   My bibliography  Save this article

Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram

Author

Listed:
  • Zhuoxin Li

    (Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467)

  • Ashish Agarwal

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

Abstract

Social media platform owners often choose to provide tighter integration with their own complementary applications (i.e., first-party applications) as compared to that with other complementary third-party applications. We study the impact of such integration on consumer demand for first-party applications and competing third-party applications by exploring Facebook’s integration of Instagram, an application in its photo-sharing application ecosystem. We find that consumers obtain additional value from Instagram after its integration with Facebook, leading to a large increase in the use of Instagram for Facebook photo sharing. Further, we find that the growth of Instagram’s user base has a positive spillover effect on big third-party applications and a negative spillover effect on small third-party applications in Facebook’s photo-sharing ecosystem. As a result, while small third-party applications face reduced demand after integration, big third-party applications experience a small increase in demand. Thus, the overall demand for the entire photo-sharing application ecosystem actually increases, which suggests that Facebook’s integration strategy benefits the complementary market overall. Our results highlight the role of platform integration for first-party applications and the application ecosystem overall, and they have implications for strategic management of first-party applications in the presence of third-party applications.

Suggested Citation

  • Zhuoxin Li & Ashish Agarwal, 2017. "Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram," Management Science, INFORMS, vol. 63(10), pages 3438-3458, October.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:10:p:3438-3458
    DOI: 10.1287/mnsc.2016.2502
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2016.2502
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2016.2502?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gautam Gowrisankaran & Marc Rysman, 2012. "Dynamics of Consumer Demand for New Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1173-1219.
    2. Lucio Fuentelsaz & Juan Pablo Maicas & Yolanda Polo, 2012. "Switching Costs, Network Effects, and Competition in the European Mobile Telecommunications Industry," Information Systems Research, INFORMS, vol. 23(1), pages 93-108, March.
    3. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 969-1005.
    4. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    5. Nedungadi, Prakash, 1990. "Recall and Consumer Consideration Sets: Influencing Choice without Altering Brand Evaluations," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 17(3), pages 263-276, December.
    6. Joseph Farrell & Michael L. Katz, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    7. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2008. "Invisible Engines: How Software Platforms Drive Innovation and Transform Industries," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550687, December.
    8. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    9. Daron Acemoglu & James A. Robinson, 2001. "A Theory of Political Transitions," American Economic Review, American Economic Association, vol. 91(4), pages 938-963, September.
    10. Frank M. Bass, 1969. "A New Product Growth for Model Consumer Durables," Management Science, INFORMS, vol. 15(5), pages 215-227, January.
    11. Brett Danaher & Yan Huang & Michael D. Smith & Rahul Telang, 2014. "An Empirical Analysis of Digital Music Bundling Strategies," Management Science, INFORMS, vol. 60(6), pages 1413-1433, June.
    12. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    13. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    14. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    15. Tasneem Chipty, 2001. "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry," American Economic Review, American Economic Association, vol. 91(3), pages 428-453, June.
    16. Burke, Raymond R & Srull, Thomas K, 1988. "Competitive Interference and Consumer Memory for Advertising," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 15(1), pages 55-68, June.
    17. Qiang Liu & Thomas J. Steenburgh & Sachin Gupta, 2015. "The Cross Attributes Flexible Substitution Logit: Uncovering Category Expansion and Share Impacts of Marketing Instruments," Marketing Science, INFORMS, vol. 34(1), pages 144-159, January.
    18. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    19. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    20. Jinyong Hahn & Guido Kuersteiner, 2002. "Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects when Both "n" and "T" Are Large," Econometrica, Econometric Society, vol. 70(4), pages 1639-1657, July.
    21. Carliss Y. Baldwin & Kim B. Clark, 2000. "Design Rules, Volume 1: The Power of Modularity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262024667, December.
    22. Randall Lewis & Dan Nguyen, 2015. "Display advertising’s competitive spillovers to consumer search," Quantitative Marketing and Economics (QME), Springer, vol. 13(2), pages 93-115, June.
    23. Anindya Ghose & Panagiotis G. Ipeirotis & Beibei Li, 2012. "Designing Ranking Systems for Hotels on Travel Search Engines by Mining User-Generated and Crowdsourced Content," Marketing Science, INFORMS, vol. 31(3), pages 493-520, May.
    24. Annabelle Gawer & Rebecca Henderson, 2007. "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 1-34, March.
    25. Hema Yoganarasimhan, 2012. "Impact of social network structure on content propagation: A study using YouTube data," Quantitative Marketing and Economics (QME), Springer, vol. 10(1), pages 111-150, March.
    26. Mei Xue & Lorin M. Hitt & Pei-yu Chen, 2011. "Determinants and Outcomes of Internet Banking Adoption," Management Science, INFORMS, vol. 57(2), pages 291-307, February.
    27. Peng Huang & Marco Ceccagnoli & Chris Forman & D. J. Wu, 2013. "Appropriability Mechanisms and the Platform Partnership Decision: Evidence from Enterprise Software," Management Science, INFORMS, vol. 59(1), pages 102-121, July.
    28. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
    29. Satish Nambisan, 2002. "Complementary Product Integration by High-Technology New Ventures: The Role of Initial Technology Strategy," Management Science, INFORMS, vol. 48(3), pages 382-398, March.
    30. Anindya Ghose & Sang Pil Han, 2014. "Estimating Demand for Mobile Applications in the New Economy," Management Science, INFORMS, vol. 60(6), pages 1470-1488, June.
    31. Farrell, Joseph & Katz, Michael L, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    32. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    33. Andrei Hagiu & Daniel Spulber, 2013. "First-Party Content and Coordination in Two-Sided Markets," Management Science, INFORMS, vol. 59(4), pages 933-949, April.
    34. Sinan Aral & Dylan Walker, 2011. "Creating Social Contagion Through Viral Product Design: A Randomized Trial of Peer Influence in Networks," Management Science, INFORMS, vol. 57(9), pages 1623-1639, February.
    35. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    36. Geraldine A. Wu, 2012. "The Effect of Going Public on Innovative Productivity and Exploratory Search," Organization Science, INFORMS, vol. 23(4), pages 928-950, August.
    37. Keller, Kevin Lane, 1991. "Memory and Evaluation Effects in Competitive Advertising Environments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 17(4), pages 463-476, March.
    38. Keller, Kevin Lane, 1987. "Memory Factors in Advertising: The Effect of Advertising Retrieval Cues on Brand Evaluations," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 14(3), pages 316-333, December.
    39. C. Clark & Ulrich Doraszelski & Michaela Draganska, 2009. "The effect of advertising on brand awareness and perceived quality: An empirical investigation using panel data," Quantitative Marketing and Economics (QME), Springer, vol. 7(2), pages 207-236, June.
    40. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jens Foerderer & Thomas Kude & Sunil Mithas & Armin Heinzl, 2018. "Does Platform Owner’s Entry Crowd Out Innovation? Evidence from Google Photos," Information Systems Research, INFORMS, vol. 29(2), pages 444-460, June.
    2. Yuki Inoue & Masataka Hashimoto & Takeshi Takenaka, 2019. "Effectiveness of Ecosystem Strategies for the Sustainability of Marketplace Platform Ecosystems," Sustainability, MDPI, vol. 11(20), pages 1-33, October.
    3. Sruthi Thatchenkery & Riitta Katila, 2023. "Innovation and profitability following antitrust intervention against a dominant platform: The wild, wild west?," Strategic Management Journal, Wiley Blackwell, vol. 44(4), pages 943-976, April.
    4. Hagiu, Andrei & Jullien, Bruno & Wright, Julian, 2018. "Creating platforms by hosting rivals," TSE Working Papers 18-970, Toulouse School of Economics (TSE), revised Mar 2019.
    5. Frédéric Marty & Julien Pillot, 2019. "Cooperation, Dependence and Eviction - How Platform-To-Business Relationships in Mobile Telephony Ecosystems Should Be Addressed in A Competition Law Perspective?," CIRANO Working Papers 2019s-01, CIRANO.
    6. John Horton, 2021. "The Ruble Collapse in an Online Marketplace: Some Lessons for Market Designers," Papers 2104.06170, arXiv.org.
    7. Jorge Padilla & Joe Perkins & Salvatore Piccolo, 2020. "Self-Preferencing in Markets with Vertically-Integrated Gatekeeper Platforms," CSEF Working Papers 582, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Hung‐Hao Chang & D. Daniel Sokol, 2022. "How incumbents respond to competition from innovative disruptors in the sharing economy—The impact of Airbnb on hotel performance," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 425-446, March.
    9. Eric Darmon & Thomas Le Texier & Zhiwen Li & Thierry Pénard, 2019. "Multimarket Contact and Platform Competition: Reassessing the Mutual Forbearance Hypothesis," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2019-07, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    10. Shu He & Jing Peng & Jianbin Li & Liping Xu, 2020. "Impact of Platform Owner’s Entry on Third-Party Stores," Information Systems Research, INFORMS, vol. 31(4), pages 1467-1484, December.
    11. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 43276, Bruegel.
    12. Tang, Hua & Chen, Jing & Ai, Xingzheng & Li, Xiaojing & He, Haojia, 2023. "First-party content decision under competitive hardware/software platforms: Free vs. charge," European Journal of Operational Research, Elsevier, vol. 311(3), pages 1068-1083.
    13. Andrei Hagiu & Bruno Jullien & Julian Wright, 2020. "Creating Platforms by Hosting Rivals," Management Science, INFORMS, vol. 66(7), pages 3234-3248, July.
    14. Naveen Kumar & Liangfei Qiu & Subodha Kumar, 2018. "Exit, Voice, and Response on Digital Platforms: An Empirical Investigation of Online Management Response Strategies," Information Systems Research, INFORMS, vol. 29(4), pages 849-870, December.
    15. Xiang Hui & Meng Liu & Tat Chan, 2022. "Targeted Incentives, Broad Impacts: Evidence from an E-commerce Platform," CESifo Working Paper Series 9894, CESifo.
    16. Xiang Hui & Meng Liu & Tat Chan, 2023. "Targeted incentives, broad impacts: Evidence from an E-commerce platform," Quantitative Marketing and Economics (QME), Springer, vol. 21(4), pages 493-517, December.
    17. Chi, Yunjia & Qing, Ping & Jin, Yong Jimmy & Yu, Jinjun & Dong, Maggie Chuoyan & Huang, Li, 2022. "Competition or spillover? Effects of platform-owner entry on provider commitment," Journal of Business Research, Elsevier, vol. 144(C), pages 627-636.
    18. Feng Zhu, 2019. "Friends or foes? Examining platform owners’ entry into complementors’ spaces," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(1), pages 23-28, January.
    19. Steffen, Nico & Wiewiorra, Lukas & Kroon, Peter, 2021. "Wettbewerb und Regulierung in der Plattform- und Datenökonomie," WIK Discussion Papers 481, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    20. Wu, Huamin & Li, Guo & Zheng, Hong & Zhang, Xuefeng, 2022. "Contingent channel strategies for combating brand spillover in a co-opetitive supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    21. Sebastian Spaeth & Sven Niederhöfer, 2022. "Compatibility promotion between platforms: The role of open technology standards and giant platforms," Electronic Markets, Springer;IIM University of St. Gallen, vol. 32(4), pages 1891-1915, December.
    22. Jorge Padilla & Joe Perkins & Salvatore Piccolo, 2022. "Self‐Preferencing in Markets with Vertically Integrated Gatekeeper Platforms," Journal of Industrial Economics, Wiley Blackwell, vol. 70(2), pages 371-395, June.
    23. Tavalaei, M. Mahdi, 2020. "Waiting time in two-sided platforms: The case of the airport industry," Technological Forecasting and Social Change, Elsevier, vol. 159(C).
    24. Zhu, Weijun & Xie, Jiaping & Xia, Yu & Wei, Lihong & Liang, Ling, 2023. "Getting more third-party participants on board: Optimal pricing and investment decisions in competitive platform ecosystems," European Journal of Operational Research, Elsevier, vol. 307(1), pages 177-192.
    25. Huayong Du & Ying Teng & Zhenzhong Ma & Xuguang Guo, 2022. "Value Creation in Platform Enterprises: A Fuzzy-Set Qualitative Comparative Analysis," Sustainability, MDPI, vol. 14(9), pages 1-21, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xing Wan & Javier Cenamor & Geoffrey Parker & Marshall Van Alstyne, 2017. "Unraveling Platform Strategies: A Review from an Organizational Ambidexterity Perspective," Sustainability, MDPI, vol. 9(5), pages 1-18, May.
    2. Mayer, Alexander, 2022. "On the local power of some tests of strict exogeneity in linear fixed effects models," Econometrics and Statistics, Elsevier, vol. 24(C), pages 49-74.
    3. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
    4. Jens Foerderer, 2020. "Interfirm Exchange and Innovation in Platform Ecosystems: Evidence from Apple’s Worldwide Developers Conference," Management Science, INFORMS, vol. 66(10), pages 4772-4787, October.
    5. Peng Huang & Marco Ceccagnoli & Chris Forman & D.J. Wu, 2009. "Participation in a Platform Ecosystem: Appropriability, Competition, and Access to the Installed Base," Working Papers 09-14, NET Institute, revised Sep 2009.
    6. Chi, Yunjia & Qing, Ping & Jin, Yong Jimmy & Yu, Jinjun & Dong, Maggie Chuoyan & Huang, Li, 2022. "Competition or spillover? Effects of platform-owner entry on provider commitment," Journal of Business Research, Elsevier, vol. 144(C), pages 627-636.
    7. Jens Foerderer & Thomas Kude & Sunil Mithas & Armin Heinzl, 2018. "Does Platform Owner’s Entry Crowd Out Innovation? Evidence from Google Photos," Information Systems Research, INFORMS, vol. 29(2), pages 444-460, June.
    8. Hema Yoganarasimhan, 2012. "Impact of social network structure on content propagation: A study using YouTube data," Quantitative Marketing and Economics (QME), Springer, vol. 10(1), pages 111-150, March.
    9. Kripfganz, Sebastian, 2014. "Unconditional Transformed Likelihood Estimation of Time-Space Dynamic Panel Data Models," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100604, Verein für Socialpolitik / German Economic Association.
    10. Christos Genakos & Kai‐Uwe Kühn & John Van Reenen, 2018. "Leveraging Monopoly Power by Degrading Interoperability: Theory and Evidence from Computer Markets," Economica, London School of Economics and Political Science, vol. 85(340), pages 873-902, October.
    11. Jiatao Li & Haoyuan Ding & Yichuan Hu & Guoguang Wan, 2021. "Dealing with dynamic endogeneity in international business research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(3), pages 339-362, April.
    12. Frondel, Manuel & Kaestner, Kathrin & Sommer, Stephan & Vance, Colin, 2022. "Photovoltaics and the solar rebound: Evidence for Germany," Ruhr Economic Papers 954, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. Weiergräber, Stefan, 2014. "Network Effects and Switching Costs in the US Wireless Industry," Discussion Papers in Economics 25094, University of Munich, Department of Economics.
    14. Ejike Udeogu (a) , Uzochukwu Amakom (b) and Shampa Roy-Mukherjee (a), 2021. "Empirical Analysis of an Augmented Schumpeterian Endogenous Growth Model," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 46(1), pages 53-84, March.
    15. Masakazu Ishihara & Andrew T. Ching, 2019. "Dynamic Demand for New and Used Durable Goods Without Physical Depreciation: The Case of Japanese Video Games," Marketing Science, INFORMS, vol. 38(3), pages 392-416, May.
    16. Chihwa Kao & Long Liu & Rui Sun, 2021. "A bias-corrected fixed effects estimator in the dynamic panel data model," Empirical Economics, Springer, vol. 60(1), pages 205-225, January.
    17. Canarella, Giorgio & Miller, Stephen M., 2018. "The determinants of growth in the U.S. information and communication technology (ICT) industry: A firm-level analysis," Economic Modelling, Elsevier, vol. 70(C), pages 259-271.
    18. Frondel, Manuel & Kaestner, Kathrin & Sommer, Stephan & Vance, Colin, 2021. "Photovoltaics and the Solar Rebound: Evidence for Germany," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242356, Verein für Socialpolitik / German Economic Association.
    19. Philipp Grunau, 2016. "The impact of overeducated and undereducated workers on establishment-level productivity," International Journal of Manpower, Emerald Group Publishing Limited, vol. 37(2), pages 372-392, May.
    20. Jinyong Hahn & Jerry Hausman & Guido Kuersteiner, 2005. "Bias Corrected Instrumental Variables Estimation for Dynamic Panel Models with Fixed E¤ects," Boston University - Department of Economics - Working Papers Series WP2005-024, Boston University - Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:63:y:2017:i:10:p:3438-3458. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.