Working Papers

Competition Perception: How Market Size and Homogeneity Shape Competition and Innovation Dynamics in Platform Markets

• Job Market Paper
• In preparation for journal submission
• Best Paper Nomination at AOM TIM Division (2023)

Abstract:

Competition is a central theme in strategic management literature, shaping firm behavior and influencing market dynamics. Traditional assessments of competition, primarily gauged by metrics based on competitor count, consider competition as similarly perceived by all market players, overlooking firms’ subjective perception of competition driven by their similarity with other players. Building on economic sociology literature and information integration theory, I explore how competitor count and homogeneity interact in shaping competition perception and firm behavior. I posit that homogeneity positively impacts firms’ perception of competition intensity. Furthermore, I argue that homogeneity shapes the impact of competitor count on competition: contrary to extant literature’s prediction, agents become less sensitive to competitor count as homogeneity increases. I use a combination of online experiments and archival analysis to test my arguments. My findings show that, as homogeneity rises, increases in competitors count have a lower marginal impact on agents’ competition perception. Furthermore, agents allocate more effort as they perceive higher competition. In my archival analysis, I examine a change in the structure of Google Play Store’s product markets where new homogenous segments were created by Google. My research design disentangles the impact of competitor count and homogeneity, making it possible to juxtapose the two. I find that increased homogeneity in new product markets, despite a drop in the competitor count, stimulates effort allocation. Conversely, reduced competitor count without a meaningful change in homogeneity of existing segments stifles effort allocation. This study highlights the role of homogeneity in shaping competition perception and firm behavior. It also nuances the impact of platform policies, showing how creating new segments affects competition dynamics across different product segments.

Keywords:

market homogenization; new product markets; competition perception; innovation; platform marketplace; discoverability and matchmaking