Market entrance model of new online service in the presence of complementarity

Abstract

This paper proposes a mixed usage model to explain the unique properties of competing online services. There have been many researches about products or technologies that exhibit network externality, but none of them had shed light on the mixed usage model which is a special characteristic of online services. We extended the framework of Arthur (1989) by using the mixed usage model and explained various cases of adoption behavior. It is shown that the quality of services decide the overall speed of adoption, and the network externality prevents the new service to be adopted when it is too large, while it helps the new service to achieve higher market share when it is moderate, in case the quality of new service is larger. And the complementarity makes the market equilibrium close to the even point where both services have equal market shares. We observed that there exists a first mover``s advantage in the mixed usage model. When the network externality is large enough, the second mover can only get a low market share, even though it provides same level of service with the first mover. But, the first mover``s advantage can be overcome with some perturbations caused by heterogeneity of consumers or uncertainty in evaluations. Also, we found out that two-step punctuated equilibrium may exist in the mixed usage model. In a specific condition, when the new service is adopted, there can be a long pause in the market share which seems to be an equilibrium. But after that, the market share goes up again to the actual equilibrium. Competition in the presence of cumulative contents is also studied. Heterogeneity or uncertainty can cause a punctuated equilibrium when there is a cumulative quality improvement. The contribution of this paper lies on that it defined a mixed usage model and constructed a solid framework to analyze the adoption behavior of online services in a competitive environment.