“When Do Markets Tip? An Experimental Study” by Tanjim HOSSAIN
Hong Kong University of Science and Technology
We report the results of laboratory experiments examining platform competition in two-sided markets. Owing to "market size" effects that favor the platform with the larger customer base, there always exist equilibria in which all participants "tip" to one platform or the other. When "market impact" effects are sufficiently large, then there also exist interior equilibria where both platforms enjoy positive market share. We vary the degree of market size and market impact effects, as well as the efficiency and access price in a market where there are two competing platforms. Regardless of the underlying parameters, we find strong support for tipping in these markets. Moreover, tipping occurs quite rapidly, often after only a few iterations of the game. The market impact effect plays no role in leading to a non-tipped market while apparent non-tipping may arise from market segmentation and slow converegence to a tipped equilibrium. Finally, we show that participants following the Pareto criterion or a cognitive hierarchies model of choice explain both tipping as well the platform that will prevail in this competition.