IDEAS home Printed from https://ideas.repec.org/a/sae/crnind/v20y2019i1p3-32.html
   My bibliography  Save this article

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

Author

Listed:
  • Agam Gupta

    (Indian Institute of Management Rohtak, India)

  • Arqum Mateen

    (Indian Institute of Management Kozhikode, India)

  • Divya Sharma

    (Indian Institute of Management Rohtak, India)

  • Uttam K. Sarkar

    (Indian Institute of Management Calcutta, India)

  • Vinu Cheruvil Thomas

    (Indian Institute of Management Tiruchirappalli, India)

Abstract

This article studies the competitive dynamics between an incumbent and a late entrant in a market governed by network effects. Classifying markets based on decision criterion used by majority of consumers in a market, an analytical model for the likelihood of incumbent displacement in these markets is developed and corroborated using simulations. Using product quality offered and product price charged by the entrant as managerial levers, the impact of managerial decision-making on the expected market share of the entrant is discussed. Efficacy of seeding and delayed entry by the entrant in an attempt to perfect its product is also examined.

Suggested Citation

  • Agam Gupta & Arqum Mateen & Divya Sharma & Uttam K. Sarkar & Vinu Cheruvil Thomas, 2019. "Combating incumbency advantage of network effects: The role of entrant’s decisions and consumer preferences," Competition and Regulation in Network Industries, , vol. 20(1), pages 3-32, March.
    • Handle: RePEc:sae:crnind:v:20:y:2019:i:1:p:3-32
    DOI: 10.1177/1783591718823922
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/1783591718823922
    Download Restriction: no
    File URL: https://libkey.io/10.1177/1783591718823922?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. Franziska Völckner & Julian Hofmann, 2007. "The price-perceived quality relationship: A meta-analytic review and assessment of its determinants," Marketing Letters, Springer, vol. 18(3), pages 181-196, September.
    2. Yifan Dou & Marius F. Niculescu & D. J. Wu, 2013. "Engineering Optimal Network Effects via Social Media Features and Seeding in Markets for Digital Goods and Services," Information Systems Research, INFORMS, vol. 24(1), pages 164-185, March.
    3. Baohong Sun & Jinhong Xie & H. Henry Cao, 2004. "Product Strategy for Innovators in Markets with Network Effects," Marketing Science, INFORMS, vol. 23(2), pages 243-254, October.
    4. Finney, R. Zachary & Lueg, Jason E. & Campbell, Noel D., 2008. "Market pioneers, late movers, and the resource-based view (RBV): A conceptual model," Journal of Business Research, Elsevier, vol. 61(9), pages 925-932, September.
    5. Piyush Sharma, 2011. "Country of origin effects in developed and emerging markets: Exploring the contrasting roles of materialism and value consciousness," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(2), pages 285-306, February.
    6. Timsit, Jean-Philippe & Castiaux, Annick & Truong, Yann & Athaide, Gerard A. & Klink, Richard R., 2015. "The effect of market-pull vs. resource-push orientation on performance when entering new markets," Journal of Business Research, Elsevier, vol. 68(9), pages 2005-2014.
    7. Donald Lehmann & Mercedes Esteban-Bravo, 2006. "When giving some away makes sense to jump-start the diffusion process," Marketing Letters, Springer, vol. 17(4), pages 243-254, December.
    8. Zhang, Tao & Zhang, David, 2007. "Agent-based simulation of consumer purchase decision-making and the decoy effect," Journal of Business Research, Elsevier, vol. 60(8), pages 912-922, August.
    9. Marvin B. Lieberman & David B. Montgomery, 1988. "First‐mover advantages," Strategic Management Journal, Wiley Blackwell, vol. 9(S1), pages 41-58, June.
    10. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    11. 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.
    12. 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.
    13. Venkatesh Shankar & Barry L. Bayus, 2003. "Network effects and competition: an empirical analysis of the home video game industry," Strategic Management Journal, Wiley Blackwell, vol. 24(4), pages 375-384, April.
    14. Liebowitz, S J & Margolis, Stephen E, 1995. "Path Dependence, Lock-in, and History," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(1), pages 205-226, April.
    15. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 197-208, June.
    16. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    17. Julian Hofmann & Michel Clement & Franziska Völckner & Thorsten Hennig-Thurau, 2007. "The price-perceived quality relationship: A meta-analytic review and assessment of its determinants," Post-Print hal-02990424, HAL.
    18. Sachin Gupta & Dipak C. Jain & Mohanbir S. Sawhney, 1999. "Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television," Marketing Science, INFORMS, vol. 18(3), pages 396-416.
    19. Zhou, Joyce Xin & Arnold, Mark J. & Pereira, Arun & Yu, Jun, 2010. "Chinese consumer decision-making styles: A comparison between the coastal and inland regions," Journal of Business Research, Elsevier, vol. 63(1), pages 45-51, January.
    20. Ronald Klingebiel & John Joseph, 2016. "Entry timing and innovation strategy in feature phones," Strategic Management Journal, Wiley Blackwell, vol. 37(6), pages 1002-1020, June.
    21. Andrea Galeotti & Sanjeev Goyal, 2009. "Influencing the influencers: a theory of strategic diffusion," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 509-532, September.
    22. Billie Jo Zirger & Modesto A. Maidique, 1990. "A Model of New Product Development: An Empirical Test," Management Science, INFORMS, vol. 36(7), pages 867-883, July.
    23. Gary L. Lilien & Eunsang Yoon, 1990. "The Timing of Competitive Market Entry: An Exploratory Study of New Industrial Products," Management Science, INFORMS, vol. 36(5), pages 568-585, May.
    24. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    25. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    26. Hiroshi Ohashi, 2003. "The Role of Network Effects in the US VCR Market, 1978–1986," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 447-494, December.
    27. Feng Zhu & Marco Iansiti, 2012. "Entry into platform‐based markets," Strategic Management Journal, Wiley Blackwell, vol. 33(1), pages 88-106, January.
    28. Morris A. Cohen & Jehoshua Eliasberg & Teck-Hua Ho, 1996. "New Product Development: The Performance and Time-to-Market Tradeoff," Management Science, INFORMS, vol. 42(2), pages 173-186, February.
    29. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
    30. Gregory S. Carpenter & Kent Nakamoto, 1990. "Competitive Strategies for Late Entry into a Market with a Dominant Brand," Management Science, INFORMS, vol. 36(10), pages 1268-1278, October.
    31. H.M. Dietl & A. Grütter & M. Lutzenberger, 2009. "Defensive Competitive Strategies in Two-Sided Markets: The Example of the Mail Industry," Competition and Regulation in Network Industries, Intersentia, vol. 10(1), pages 3-16, March.
    32. Jeho Lee & Jaeyong Song & Jae-Suk Yang, 2016. "Network structure effects on incumbency advantage," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1632-1648, August.
    33. Animesh Animesh & Siva Viswanathan & Ritu Agarwal, 2011. "Competing “Creatively” in Sponsored Search Markets: The Effect of Rank, Differentiation Strategy, and Competition on Performance," Information Systems Research, INFORMS, vol. 22(1), pages 153-169, March.
    34. Levin, Irwin P & Johnson, Richard D, 1984. "Estimating Price-Quality Tradeoffs Using Comparative Judgments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 11(1), pages 593-600, June.
    Full references (including those not matched with items on IDEAS)

    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. Heli Koski & Tobias Kretschmer, 2004. "Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 4(1), pages 5-31, March.
    2. Qi Wang & Huazhong Zhao & Jinhong Xie, 2016. "Intra-Standard Competition: The Joint Impact of an Installed-User Base and a Supporting-Firm Base in Markets with Network Effects," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 3(3), pages 159-174, December.
    3. Liang Chen & Noman Shaheer & Jingtao Yi & Sali Li, 2019. "The international penetration of ibusiness firms: Network effects, liabilities of outsidership and country clout," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(2), pages 172-192, March.
    4. Daniel Birke, 2009. "The Economics Of Networks: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 762-793, September.
    5. Stremersch, S. & Tellis, G.J. & Franses, Ph.H.B.F. & Binken, J.L.G., 2007. "Indirect Network Effects in New Product Growth," ERIM Report Series Research in Management ERS-2007-019-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    6. den Hartigh, E. & Langerak, F. & Commandeur, H.R., 2002. "The Effects of Self-Reinforcing Mechanisms on Firm Performance," ERIM Report Series Research in Management ERS-2002-46-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    7. Chang, Sungyong & Park, Sanghyun, 2021. "Borders of Network Effects and Early Internationalization as a Latecomer Strategy," SocArXiv d74he, Center for Open Science.
    8. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    9. Binken, J.L.G. & Stremersch, S., 2008. "The Effect of Superstar Software on Hardware Sales in System Markets," ERIM Report Series Research in Management ERS-2008-025-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    10. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & David P. McIntyre & Arati Srinivasan, 2017. "Networks, platforms, and strategy: Emerging views and next steps," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 141-160, January.
    11. Jean-Pierre H. Dubé & Günter J. Hitsch & Pradeep K. Chintagunta, 2010. "Tipping and Concentration in Markets with Indirect Network Effects," Marketing Science, INFORMS, vol. 29(2), pages 216-249, 03-04.
    12. Joost Rietveld & J. P. Eggers, 2018. "Demand Heterogeneity in Platform Markets: Implications for Complementors," Organization Science, INFORMS, vol. 29(2), pages 304-322, April.
    13. Sillanpää, Antti & Laamanen, Tomi, 2009. "Positive and negative feedback effects in competition for dominance of network business systems," Research Policy, Elsevier, vol. 38(5), pages 871-884, June.
    14. Netsanet Haile & Jorn Altmann, 2015. "Value Creation in Software Service Platforms," TEMEP Discussion Papers 2015123, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Sep 2015.
    15. Mak, Vincent & Zwick, Rami, 2010. "Investment decisions and coordination problems in a market with network externalities: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 759-773, December.
    16. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    17. Kevin J. Boudreau & Lars Bo Jeppesen & Milan Miric, 2022. "Competing on freemium: Digital competition with network effects," Strategic Management Journal, Wiley Blackwell, vol. 43(7), pages 1374-1401, July.
    18. Schade, Sven & Buxmann, Peter, 2005. "A Prototype to Analyse and Support Standardization Decisions," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35795, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    19. Netsanet Haile & Jorn Altmann, 2013. "Estimating the Value Obtained from Using a Software Service Platform," TEMEP Discussion Papers 2013105, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Aug 2013.
    20. Tommy Pan Fang & Andy Wu & David R. Clough, 2021. "Platform diffusion at temporary gatherings: Social coordination and ecosystem emergence," Strategic Management Journal, Wiley Blackwell, vol. 42(2), pages 233-272, February.

    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:sae:crnind:v:20:y:2019:i:1:p:3-32. 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: SAGE Publications (email available below). General contact details of provider: .

    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.