Introduction to Digital Economics by Harald Øverby & Jan Arild Audestad

Author:Harald Øverby & Jan Arild Audestad
Language: eng
Format: epub
ISBN: 9783030782375
Publisher: Springer International Publishing

2 Competition and Path Dependence

Competition in digital markets with zero marginal costs (e.g., Facebook vs Myspace) or between technologies designed to different standards (e.g., VHS vs Betamax) may be subject to path dependence. Usually, only one of the competitors will survive so that the number of possible equilibrium states is equal to the number of competitors, for example, two for the VHS vs Betamax. It is not possible to predict beforehand which of the competitors will be the winner.

The evolution of multisided platforms is a little more complex. Facebook is a multisided platform where one of the business sectors is social networking services. In the competition with Myspace, arbitrary events generated a path in which Facebook ended up as a de facto monopoly for social networking services (see ► Case Study 11.2). Facebook is not a de facto monopoly in the other market segments of the platform. In the advertising market, it competes with several other companies, most notably, Google. These market segments will end up in a state which, for Facebook, depends on the number of users of the social networking services and, for Google, the number of people using the search engine. Neither of them will become a monopoly in the advertisement sector since both are important advertisement channels targeting different user groups.

One of the most analyzed examples of the competitive war between technological standards is the competition between VHS and Betamax. The case is also used as pedagogic example of path dependence because it illustrates in a simple way how path dependence may arise and lead to a winner-takes-all situation (see the Wikipedia article for more details (Wikipedia, n.d.)).

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