Friends in High Places: Demand Spillovers and Competition on Digital Platforms

Abstract

By lowering transaction costs, digital platforms may foster complementary dynamics across offerings that compete in other settings. In a study of the Spotify music streaming platform, I study the effect of peer expansion on provider performance and consider when demand spillovers outweigh substitution across providers on a digital platform. I find that, on average, increases in peer demand improve provider performance on the Spotify platform, however provider characteristics moderate this effect. Expansion by popular peers improves provider performance, while expansion by niche peers does not generate sufficient spillovers to overcome the negative effects of substitution. I explore how platform recommendation systems magnify spillovers and consider the strategic implications of these market dynamics. In doing so, I highlight that digital platforms alter how firms compete and whom they compete with.