Modeling the Dynamics of Network Entry and Competition Under Single- and Multi-Homing

Abstract

In this paper we apply a general model of one-sided platform businesses to a duopoly competitive framework. We have a particular interest in how the option of multi-homing affects the competitive dynamic. We find that if multi-homing is precluded, the incumbent platform is always able to dominate, and usually eliminate, an entrant platform, even if the entrant has advantages in terms of operational efficiency or network quality. However, when multi-homing is allowed, a superior entrant can supplant an incumbent platform if network effects are neither too strong nor too weak. If network effects are too weak, there is no value to multi-homing and outcomes are identical to the single-homing case. If network effects are too strong, the power of incumbency is too great and the entrant will fail.

Keywords: Platforms, Networks, Network Effects, Competition, Single-Homing, Multi-Homing, Entry, Entry Deterrence, Incumbency Advantage, Deadweight Loss, Numerical Resolution

JEL Classification: C24, C61, C62, C63, K21, L12, L43, L51, L90