Subsidy Wars for Market Dominance in Emerging Digital Platform Markets

Abstract

Digital platform markets are emerging rapidly with technological innovation, creating new market opportunities and unique challenges. In response, platforms in such markets compete aggressively through high subsidies for market dominance, leveraging network effects to achieve success. We examine such aggressive subsidy wars between new competitors and dominant incumbents, where the one that first runs out of funds risks market expulsion or marginalization. Our analysis incorporates consumer heterogeneity in network effects to evaluate subsidy strategies from a cost-effectiveness perspective. That is digital platforms, whether serve as suppliers or channels in platform-based supply chains, optimize either per acquisition cost or total subsidy expenditure. Our findings reveal that it is optimal for the dominant platform to protect its market dominance when the competitor's market share reaches a certain level, varying in distinct competitive contexts. Specifically, for channel platforms connecting buyers and suppliers, subsidy allocation must be balanced between user groups. We find that new competitors should typically subsidize the side with lower market share, while dominant platforms maintain equal market shares on both sides by adjusting subsidies in most cases. Interestingly, our findings demonstrate that a dominator's larger market shares cannot guarantee its competitive advantage in subsidy wars, which is influenced by the factors such as cost structure, competitor's financial capabilities, network effect strength, and product differentiation. We also identify critical conditions for new competitors to successfully win market dominance through initiating subsidy wars, while offering strategic guidance for dominant incumbents to defend their positions.