New Layer Player Co-Opetition Strategy in Two-Sided Markets

This study describes and formulates the “new layer player co-opetition strategy” in a two-sided market. A new layer player co-opetition strategy intermediates between one side of the market and the incumbent platform(s). Nearly all previous studies on competition in two-sided market platforms have excluded from consideration strategies that involve elements of both competition and cooperation, i.e., “co-opetition.” The strategy developed herein combines cooperative elements that benefit incumbent platforms through market expansion and alliance fees, with competition for market share. We first develop a mathematical model based on two-sided market theory for entry by a new layer player, through horizontal or vertical differentiation, into an industry with a single incumbent platform. We then analyze conditions under which (i) the new layer player will enter the industry and (ii) profits are maximized by the new layer player’s entry. We also develop a model in which a new layer player enters an industry with multiple incumbent platforms through horizontal differentiation. Using the results of our analysis, we are able to logically explain a number of real-world cases, including those of Amazon Marketplace, affiliated credit cards, advertising agents, the U.S startup Square, and mobile virtual network operators (MVNOs). The new layer theory developed in this paper constitutes a substantial contribution to the understanding and implementation of strategies aimed at growing the businesses of both new layer players and incumbent platforms through relationships that combine competition and cooperation