Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

Résumé

The entry of firms into a platform has an ambiguous effect on the profitabil- ity of incumbent firms’ operating on the platform: While entry increases competitive pressure on incumbents, supply-side expansion may attract new consumers—effectively increasing total platform size and presumably benefiting all firms. This paper explores how firm entry affects incumbents’ outcomes in a two-sided market. I study a quasi-exogenous increase in firms on a large online platform and exploit geographic variation to employ a difference-in-differences research design. I find that, on average, market expansion favors incumbents, though the average effect masks substantial heterogeneities: High-quality incumbent firms experience a positive effect, whereas low-quality firms perform unambiguously worse. Lastly, I explore the main mechanisms and firms’ strategic responses.