Market Entry and Two-Sided Market Competition

The ongoing debate over market entry highlights opposing views of the necessary and sufficient conditions for firms to successfully enter new markets. Whether or not early mover advantages are sustainable is of predominant importance in explaining market entry success (Lieberman & Montgomery, 1988). Both understanding the order of entry effect (Dowell &

Swaminathan, 2006; Fuentelsaz, Gomez, & Polo, 2002; Mitchell, 1991; Robinson, Fornell, &

Sullivan, 1992) and the firm’s resources or dynamic capabilities that allow it to main successful operations post-entry (Helfat & Lieberman, 2002; Klepper & Simons, 2000; Lee, 2008;

Schoenecker & Cooper, 1998) are argued to be necessary for understanding this issue. However, answering the question of first-mover advantage divides scholars into two camps. The first finds that the advantages of early entry are substantial (Lambkin, 1988; Lieberman, 1989; Makadok, 1998; Urban et al., 1986; Yip, 1982), while the second argues that early entry itself is not sufficient to ensure a sustainable market position (Cho, Kim, & Rhee, 1998; Christensen, 1997; Christensen

& Bower, 1998; Dowell & Swaminathan, 2006; Freeman, 1997; Schnaars, 1995; Shankar, Carpenter, & Krishnamurthi, 1998). The extensive literature supporting and countering both sides of this debate serves to underscore the critical importance of situational factors that make

overarching inference untenable without consideration for the particular market’s contextual factors in addition to the firms’ relative capabilities.

One type of market which has been the subject of extensive study precisely because of its contextual factors—namely, the presence of network externalities—is the two-sided, or platform-based, market. Increasingly many industries are organizing around these two-sided platforms (Boudreau, 2010; Eisenmann, Parker, & Van Alstyne, 2006; Iansiti & Levien, 2004a), which heightens the need not only for businesses to refocus on their business model and the benefits to be gained from complementors but also to understand and plan for the substantial impact of network effects (Rochet, 2003). These network effects may come in the form of same-side (direct) network effects, by which users are either positively or negatively affected with the addition of users on the same side, such as positive same-side benefits experienced by social network users. Or they may be present as cross-side (indirect) network effects, through which users are either beneficially or adversely affected by the addition of users on the other side of the market, like positive cross-side network effects between automobile drivers and retail gas stations (Eisenmann et al., 2006). While these two types of network effects seem similar, in practice they can produce very different results (M. Clements, 2004).

There are numerous different examples of two-sided markets (see Rochet 2003;

Eisenmann, Parker, and Alstyne 2006; Zhu and Iansiti 2011), but some of the most commonly

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studied are high technology products: namely video games, (M. T. Clements & Ohashi, 2005;

Corts & Lederman, 2009; J E Prieger & Hu, 2006; M. A. Schilling, 2003; Shankar & Bayus, 2003;

Srinivasan & Venkatraman, 2008, 2010; Strube et al., 2007), PDAs (Nair, Chintagunta, & Dube, 2004), VCRs (Ohashi, 2003; Park, 2004), and software (Church & Gandal, 1992; Cottrell & Koput, 1998). The opinions in this discussion, as with market entry in general, are divided. One group of scholars argue that network effects will compound a slight installed base advantage into an insurmountable force as new consumers and developers disproportionately join the leading platform (Lieberman, 2007; Park, 2004; M. Schilling, 1999; M. A. Schilling, 2003; Shapiro &

Varian, 1999; Sheremata, 2004). The second group, however, holds that quality advantage is still critical in platform-based markets, and this quality advantage can allow an entrant with an installed base or application base disadvantage to catch up to, even overtake, the incumbent platform of inferior quality (S J Liebowitz & Margolis, 1994; S. Liebowitz, 2002; Stanley J Liebowitz &

Margolis, 1999; Rangan & Adner, 2001; Suarez & Lanzolla, 2007; Tellis, Yin, & Niraj, 2009). In fact, Evans' (2003) survey of empirical aspects of these two-sided markets, demonstrated that many late entrants platforms are indeed able to erode the early mover’s market share and enter successfully.

The source of this disagreement in the literature stems from the conflicting views of the determinants of success for the incumbent and entrant platforms. Predominantly quality and network effects are included as two key factors, but there is disagreement over their relative importance and which one, if either, can be a fundamental determinant of platform success. Gretz (2010), for example, found that quality was overwhelming more influential in determining a

platform’s market share and predicting platform success than network size. Conversely, Park (2004) demonstrated network advantage to account for over 70.3% of the VCR sales in the 1980, and Zhu and Iansiti (2011) found that, when considered with the additional factor of consumer’s discounted expectations for future applications, indirect network effects can be impactful enough to

categorically determine the entrant’s success or failure. Specifically in their model, the new platform’s equilibrium market share increases from oligopoly to monopoly as the indirect network effects strength increases from less than 1.0 to greater than 1.0, but there is a threshold beyond which the strength of the indirect network effects will completely shut out the entrant platform from the market, due to its applications disadvantage. Furthermore, Corts and Lederman (2009) consider application exclusivity and finds that indirect network effects are not only platform-specific but also generation-platform-specific among platforms, which means the network effects themselves are actually moderated by levels of hardware quality. The evidence on both sides suggests that regardless of their relative levels of importance, quality and network effects must both be considered together in order to accurately evaluate entry into two-sided markets.

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Network effects and quality are both influential factors in telecommunications as well, which is the focal industry of this study. Network effects, when considered on their own, have been shown to be substantial in mobile telecom markets (Doganoglu & Grzybowski, 2007). On the other hand, when quality and network effects are considered together, as Sunada (2008) did in a study of the late 1990s Japanese mobile telecom market, then the impact of quality can be shown to exceed that of network effects.

However, these are same-side network effects and not the cross-side network effects previously discussed in the literature on high tech products. The majority of the literature examining network effects in the mobile telecom market focuses on same-side network effects.

These have been attributed to the users preference for large user base and greater compatibility (Grajek, 2010). Direct network effects are also argued to result from sub-networks, or user groups’

social networks, impacting the telecom operator selection (Sobolewski & Czajkowski, 2012). This may be due to in-network calling discounts and other pricing considerations (Birke & Swann, 2005;

Fu, 2004), as well as due to the signaling effect that large network size implies for the quality of MNOs service or coverage (Kim & Kwon, 2003). Finally, in addition to personal network effects, switching costs are also influential in determining consumer’s MNO subscribership decisions (Maicas, Polo, & Sese, 2009)

There are some key differences between the high tech product markets evaluated in the literature and the market of concern for this investigation, mobile telecommunications. For one, subscribers usually only buy one handset, or at most a few pieces of mobile hardware from the network equipment providers (NEPs) and subscribe for service with an MNO, but the content that they use on those devices (e.g., mobile applications) are the products of developers from another platform, the mobile operating system (e.g., iOS, Android, MS mobile, Symbian, etc.) with different platform providers (e.g., Apple, Google, Microsoft, Nokia, etc.). Of course these mobile telecom service providers and mobile phone operating system platforms are all interconnected within the mobile telecom ecosystem; however, an evaluation of mobile telecom technology standards competition, though affected by mobile phone operating systems, is focused more on the consumer choice of MNO and purchase of hardware, as well as the NEPs’ provision of hardware.

It is not strictly concerned with the users’ consumption of mobile software and auxiliary services.

Furthermore, even within the mobile telecom market, the focus of the aforementioned literature on same-side network effects impacting subscribers’ choice of MNO is not representative of the 3G vs WiMAX technology standards battle. Since many different MNOs operate either within the 3G technology standards group of incumbents or the WiMAX 802.16 entrant standard, then users switching between MNOs that operate on same technology standard is inconsequential, as we consider their user bases collectively. Consequently, a deeper investigation into the factors

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affecting the mobile telecom market, which potentially extend beyond quality and network effects, is necessary to inform the design of a dynamic model of market entry that can represent WiMAX’s entry versus 3G.