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When Do Markets Tip? A Cognitive Hierarchy Approach

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  • Tanjim Hossain

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • John Morgan

    (Department of Economics, Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

Abstract

The market structure of platform competition is critically important to managers and policy makers. Network effects in these markets predict concentrated industry structures, whereas competitive effects and differentiation suggest the opposite. Standard theory offers little guidance---full rationality models have multiple equilibria with wildly varying market concentration. We relax full rationality in favor of a boundedly rational cognitive hierarchy model. Even small departures from full rationality allow sharp predictions---there is a unique equilibrium in every case. When participants single-home and platforms are vertically differentiated, a single dominant platform emerges. Multihoming can give rise to a strong--weak market structure: one platform is accessed by all, and the other is used as a backup by some agents. Horizontal differentiation, in contrast, leads to fragmentation. Differentiation, rather than competitive effects, mainly determines market structure.

Suggested Citation

  • Tanjim Hossain & John Morgan, 2013. "When Do Markets Tip? A Cognitive Hierarchy Approach," Marketing Science, INFORMS, vol. 32(3), pages 431-453, May.
    • Handle: RePEc:inm:ormksc:v:32:y:2013:i:3:p:431-453
    DOI: 10.1287/mksc.1120.0770
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