Too big to fail? Overcrowding a multi-sided platform and sustained competitive advantage

Abstract

Multi-sided platforms are increasingly common, which is no surprise given the winner-take-all dynamics in platform-based markets. That is, the platform with the biggest installed base of buyers and sellers can arguably sustain its competitive advantage because of positive indirect network effects. We reexamine this argument with an agent-based simulation model, where we allow for variety seeking and probabilistic buyer affiliation with platforms and interactions with sellers. Against the extant literature, we show that incumbency advantage is more unlikely to last when increasing the relative number of sellers to buyers on the incumbent platform. This is because extreme competition for buyers drives sellers and hence buyers, because of positive indirect network effects, to increasingly affiliate with the uncrowded entrant platform. We thus add to the literature by explaining how sustaining an installed base advantage is contingent on avoiding overcrowding a platform with too many sellers.