Working Papers

Competition Perception: How Market Size and Homogeneity Shape Competition and Innovation Dynamics in Platform Markets

• Job Market Paper
• In preparation for journal submission
• Best Paper Nomination at AOM TIM Division (2023)

Abstract:

Understanding the relationship between competition and innovation has been an important topic in extant literature. However, conflicting findings on the relationship between these factors have led studies into positing contextual influences or non-linear relationships between competition and innovation. I posit that traditional assessments of competition intensity, primarily gauged by metrics based on market size, overlook the importance of firms’ perception of competition intensity driven by their similarity with other market players. Building on economic sociology literature and information integration theory, I explore how market size and homogeneity interact in shaping perception of competition and subsequently the incentive to innovate. I posit that market homogeneity plays a predominant role in shaping perceived competition intensity compared to market size. Furthermore, I argue that market homogeneity shapes the impact of market size on competition intensity, with agents becoming less sensitive to market size as homogeneity increases. I examine a change in the structure of Google Play Store’s product markets in 2016, creating new segments while altering market homogeneity. My research design disentangls the impact of size and homogeneity, enabling me to juxtapose the two elements. I find that increased homogeneity in new product markets, despite a drop in the market size, stimulates innovation. Conversely, reduced size without a meaningful change in homogeneity of existing segments, stifles innovation. I also conduct an experiment to further show the lower sensitivity of agents to market size in perceiving competition as homogeneity increases. This study highlights the role of market homogeneity in shaping competition perception and innovation. It also nuances the impact of platform policies, showing how creating new segments affects innovation incentives across different product segments.

Keywords:

market homogenization; new product markets; competition perception; innovation; platform marketplace; discoverability and matchmaking