Online Platform Competition with Asymmetric Revenue Structures

Abstract

A new online platform may only charge advertisers to compete with a leading incumbent one that collect fees from its users. When these two platforms compete with asymmetric revenue structures, the result of the competition can be different depending on several factors such as the degrees of users singlehoming, the potential market size, and the price-sensitivity of users charged by the incumbent. It is shown that unless all the users singlehome, the latecomer can overtake the incumbent when the potential market size is large or the price-sensitivity of the user group charged by the incumbent is high. This result is also consistent with the anecdotal evidences in China and the US to a degree. This study first shows that a potential market size can change the winner of the competition between an incumbent platform and a new one with asymmetric revenue structures. When one side tends to join the two platforms at a time, the latter can overtake the former if the market is not mature so that there is a room for its further growth. When Taobao started to compete with eBay China in 2003, the market itself was at an intial stage, so that Taobao could win over eBay China by not charging its sellers. On the other hand, Webstore, a free advertising-based online auction platform in the US, has been far behind eBay since its launch in 2008 was too late to change the winner of the competition. The users’ price-sensitivity also impacts the competition. Unless both buyers and sellers singlehome, if sellers are highly price-sensitive, the latecomer can win over the incumbent even when the potential market size is small. As Barnett et al. (2010) indicate, Chinese online auction sellers could have been unfamiliar with and averse to the idea of paying transaction fees. Unfortunately, eBay China adopted the policy of charging its sellers when it entered the market acquiring the leading local platform EachNet in 2003. Taobao, a small player at that time, did not impose any transaction fees on sellers and so could eventually attract more sellers than eBay China in a few years.