Working Papers

Competition Dynamics, Market Homogeneity, and Innovation: A Study of Product Market Changes in Platform Marketplace

Abstract:

Understanding the relationship between competition and innovation has been an important topic in extant literature. However, conflicting findings on the relationship between these factors have led studies to posit non-linear relationships and contextual influences like industry stages. Traditional assessments of competition intensity, primarily gauged by competitor numbers, have overlooked a crucial determinant: the similarity among market players. This paper explores how market player heterogeneity influences competition dynamics and innovation. I posit that heightened product similarity in a market segment intensifies competition, urging firms to innovate further. I examine a change in the structure of Google Play Store’s product markets in 2016, creating new segments while altering product heterogeneity. This change allows disentangling the impact of changes in market size and product homogeneity in a sector, enabling me to juxtapose the two. I find that increased homogeneity in new product markets, despite a drop in market size, stimulates innovation and enhances user acquisition. Conversely, reduced size without meaningful heterogeneity changes in existing segments stifles innovation. This study highlights the role of market player heterogeneity in shaping competition and innovation perceptions. It also nuances platform policy effects, showing how creating new segments affects innovation incentives differently in existing and new markets. Additionally, it challenges the notion that product markets are solely defined by collective player understanding, revealing the influence of regulators/orchestrators in reshaping market compositions.

Keywords:

market homogenization; new product markets; market competition; matchmaking; innovation; platform marketplace