Incumbency Advantage and Its Value
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ARTICLE SUMMARY
Incumbent digital platforms may enjoy advantages over new entrants. Factors affecting the extent of the incumbent’s advantage include consumer coordination problems and consumers’ ability to join more than one platform.
POLICY RELEVANCE
Regulators can reduce some incumbent advantages by requiring access to data.
KEY TAKEAWAYS
- In a market with network effects, an incumbent firm will enjoy advantages over new entrants; both consumers and producers benefit when there is only one platform or only a few platforms.
- An “incumbent” firm already has an installed base when competition begins.
- The incumbent will tend to earn higher profits than a new entrant, even if the new entrant offers the same or better price and quality terms.
- Incumbency advantage is measured by considering how much better the new entrant’s price and quality terms must be to attract consumers.
- The incumbent will tend to earn higher profits than a new entrant, even if the new entrant offers the same or better price and quality terms.
- Coordination problems contribute to incumbency advantage; multiple consumers are rarely able to coordinate their actions to switch from one platform to another platform.
- Suppose that an incumbent social media site has 10,000 consumers, each of which receive $50 in benefit from being on the site while the other 9,999 are also on it; this benefit could rise to $65 if all switch to a superior new entrant, but no consumer is likely to switch if they do not all do so.
- Economists explain that each consumer believes that no one else will migrate, a "belief-based" model of incumbency advantage.
- The movement of consumers from one platform to another is like that of a group of pedestrians hoping to cross a busy street; if all move in a group, the cars will stop for them and they will make it across, but no pedestrian is willing to make the first move.
- Data is also a source of incumbency advantage.
- First, data about specific consumers’ past behavior helps the platform serve those individuals better.
- Second, data about other users helps the platform train algorithms that serve all users.
- First, data about specific consumers’ past behavior helps the platform serve those individuals better.
- Regulatory remedies for competition problems may require access to data.
- Data portability rules reduce the incumbent’s advantage in serving specific customers.
- Access to data is different from access to essential patents, as competitors can acquire their own data when they grow larger.
- Data portability rules reduce the incumbent’s advantage in serving specific customers.
- Factors that reduce incumbency advantage include:
- Multi-homing, which occurs when consumers join multiple platforms.
- Entrants' ability to differentiate their product by catering to idiosyncratic consumers’ tastes.
- The market power of marquee users offering exclusive content (such as NFL football or Gucci fashion) can help either the incumbent or the new entrant.
- Multi-homing, which occurs when consumers join multiple platforms.
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About Gary Biglaiser
Gary Biglaiser is a Professor with the Department of Economics at the University of North Carolina – Chapel Hill. He has wide-ranging research interests in applied microeconomic theory with a concentration on industrial organization and regulation. His most recent research is focused on durable goods monopoly (with James Anton), Moonlighting (with Albert Ma) and dynamic oligopoly (with Nikos Vettas).
See more with Gary Biglaiser
About Jacques Crémer
Jacques Crémer is a Toulouse School of Economics (TSE) Research Faculty and Professor of Economics at the Toulouse School of Economics (TSE). He has done fundamental work on planning theory, the theory of auctions and organization theory. Professor Crémer’s current research interests are the theory of organizations, political economy, and networks, software and the internet.
