A Theory of Digital Ecosystems

Paul Heidhues (), Mats Köster () and Botond Kőszegi ()
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Paul Heidhues: Heinrich Heine University Düsseldorf
Mats Köster: Central European University, Vienna
Botond Kőszegi: University of Bonn

No 329, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We develop a model of digital ecosystems based on the assumption that a multimarket firm can use a sale in or data from one market to steer users toward its products in other markets. Due to this “cross-market leverage,” a market leader at an “access point” (where users begin their online journeys) has a high value from offering services in connected markets (where users continue their journeys), and can thus make profitable takeovers. Indeed, because the firm has the threatening outside option of acquiring, and steering users toward, its target’s competitor, it can take over the target at a discount. In contrast, other firms have no or smaller incentives for takeovers, explaining why ecosystems grow out of market leaders at access points. Conversely, cross-market leverage also implies that once an ecosystem has grown, it has an increased value of controlling access points, so it may go to great lengths to dominate these markets. Our theory’s logic suggests that ecosystems have mixed implications for consumer welfare. Under plausible assumptions, a to-be ecosystem takes over market leaders, and this consolidation of good services across markets benefits consumers in the short run. But an ecosystem’s takeovers and dominance of access points lower incentives for entry and innovation, and lower the efficiency of access-point markets with superior alternatives. Hence, the long-run welfare implications of ecosystem growth are often negative.

Keywords: Digital ecosystems; takeover; contestability; entry; envelopment; default effects; steering (search for similar items in EconPapers)
JEL-codes: D43 D83 L22 L41 L86 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2024-07
New Economics Papers: this item is included in nep-com, nep-mic, nep-pay, nep-reg and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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