Growing Platforms Within Platforms: How Do Platforms Manage the Adoption of Complementor Products in the Presence of Network Effects?
Author(s) Information:
Shiva Agarwal, University of Texas at Austin
Cameron D. Miller, Syracuse University
Martin Ganco, University of Wisconsin
Journal (Year):
Strategic Management Journal, forthcoming in 2023
One sentence summarizing the essence (findings or implications) of your paper:
Third-party products that have direct network effects create a unique challenge for platform owners which they can manage using selective promotion.
Research Questions:
How can platform owners promote complementor products with direct network effects to achieve the balance between encouraging adoption versus mitigating the risk of complementors’ dominance?
What we know:
Platform owners want to create value for users (like consumers who play video games), complementors (like app developers), and of course, capture value themselves. Managing product categories on digital platforms can come with unique challenges not typically faced in traditional retail settings. One such challenge emerges when third-party complementors offer products that have direct network effects. A product has direct network effects when the value of using a product depends on the number of other users adopting the product and their level of engagement with the product. We study how Apple manages categories of games in the App Store. Examples of games with direct network effects include massively multiplayer games for which adoption and participation by many other players are important to the gaming experience.
Originality/Value - Novel Findings:
We argue that the platform owner is more sensitive to the market structure of its product categories when many of the products have direct network effects. In our context, users don’t derive much utility from playing multiplayer gamers with few other users. However, when all users adopt the same game, the market can tip towards a dominant complementor who may then challenge the platform owner’s rules (the lawsuit between Epic and Apple is an example).
We find that Apple uses promotion to strike a balance in the category. Specifically, when the category is less concentrated, Apple is more likely to promote a successful complementor who can attract and maintain users, when the category is more concentrated, Apple is less likely to promote a dominant complementor and more likely to promote a challenger.
Implications for Practice:
We highlight the challenge that product-level direct network effects can create for a platform owner and show how the platform owner can manage the challenge using promotion. Our findings show how platform owners can use awards as a tool to manage complementors, especially the dominant ones. The results also shed light on the conditions when platform owners should promote the adoption of a leading complementor and when to promote a challenger. Platform owners may benefit from understanding these nuances in using awards as a tool to manage adoption. Further, we highlight various strategic considerations regarding product design and entry decisions relevant for complementors
Implications for Research:
Our study examines one way in which category management may tend to differ on a digital platform than in a traditional retail setting. More research is needed to understand how digital platforms differ from traditional settings and what strategies can be used to solve these potentially unique challenges.
Full Citation:
R. Agarwal, S, Miller, C.D., & Ganco, M. (Forthcoming). Growing platforms within platforms: How do platforms manage the adoption of complementor products in the presence of network effects? Strategic Management Journal.
Abstract:
Platform owners often use endorsements to actively manage complementor firms. We argue that the direct network effects of complementors' products play a central role in the platform management by its owner. We test our predictions using data on Apple's promotion of apps. We find that apps with network effects are more likely to receive an award. This likelihood increases when the app is introduced by a developer with a larger market share but declines when introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. Further, we observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader.
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