A Network Perspective of Digital Competition in Online Advertising Industries: A Simulation-Based Approach

Abstract

Using agent-based simulation experiments, we investigate the outcome of SAs between two smaller online search engine companies in competition with a dominant market leader in settings where an advertiser's decision making is the consequence of a combination of NI (e.g., an individual's willingness to follow others' decisions) and IP. In particular, we focus on a context in which the combined search engine company competes with a market leader holding a larger share of the market than the two runner-up “underdogs” combined. Our results indicate that, with the presence of NI and cascading effects, an alliance with “only” 35%–40% combined market share could compete with a leader whose market share, at the time of an alliance, is 60%–65%. Although important, size alone might be insufficient to build the market as suggested by the “vanilla” network effect theory. Another noteworthy finding is that a nonlinear association exists between NI and an alliance outcome; the combined runner-up companies have the best chance of success when the extent of NI is midrange, rather than on the high or low end of continuum. Contrary to the conventional view, this finding might also stimulate discussions among network science researchers. Furthermore, our results suggest that NI substantially moderates the relationship between the combined market share at the time of an alliance and the likelihood of resulting alliance success.