When Do Markets Tip? A Cognitive Hierarchy Approach

Tanjim Hossain () and John Morgan

Marketing Science, 2013, vol. 32, issue 3, 431-453

Abstract: The market structure of platform competition is critically important to managers and policy makers. Network effects in these markets predict concentrated industry structures, whereas competitive effects and differentiation suggest the opposite. Standard theory offers little guidance---full rationality models have multiple equilibria with wildly varying market concentration. We relax full rationality in favor of a boundedly rational cognitive hierarchy model. Even small departures from full rationality allow sharp predictions---there is a unique equilibrium in every case. When participants single-home and platforms are vertically differentiated, a single dominant platform emerges. Multihoming can give rise to a strong--weak market structure: one platform is accessed by all, and the other is used as a backup by some agents. Horizontal differentiation, in contrast, leads to fragmentation. Differentiation, rather than competitive effects, mainly determines market structure.

Keywords: platform competition; bounded rationality; cognitive hierarchy; vertical and horizontal differentiation (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://dx.doi.org/10.1287/mksc.1120.0770 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:32:y:2013:i:3:p:431-453

Access Statistics for this article

More articles in Marketing Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().