Internet Portals as Portfolios of Entry Options

Enrico Perotti and Silvia Rossetto

No 00-105/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We investigate the valuation of platform investment, such as asoftware operating system or anInternet portal WebPage. Platform investment is the creation of aninnovative distribution andproduction infrastructure, which increases access to customers; as aresult it reduces entry costs inrelated products. Relative to conventional producers, firms builtaround platforms enjoy enhancedentry options in uncertain market segments, to be exercised at theoptimal strategic timing. Whenthe platform grants a strong strategic advantage, the innovator firmcan optimally choose the timingof entry when its strategic gain exceeds the value of the waitingoption; in case of weakeradvantage, the platform firm enters just before its competitor would.In a context of increaseduncertainty, the relative value of platform to traditional strategiesincreases; the value of waiting toinvest rises, but the value of platforms increases even more. In somecases, platform can reduceentry by making parallel monopoly sustainable.

Date: 2000-12-05
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