For whom the recession does not toll.

Who might possibly come out ahead in a recession? In industries with network effects (2-sided platforms, exchanges, markets, video games, computing software + hardware, social networks, etc.), the incumbent is typically placed in an unassailable position: positive feedback means that the big first mover just gets bigger, and wins the market. I’ve discussed in other work (“Economic and Technical Drivers of Technology Choice: Browsers” with Tim Bresnahan and “Competition between Exchanges: Lessons from the Battle of the Bund” with Estelle Cantillon) how there are narrow windows of opportunity and a critical set of conditions necessary for a second-mover to defeat a first-mover advantage under network effects. Specifically, being able to tap into new adopters, rather than trying to get customers of the incumbent to switch, and doing so when market demand is exploding, are key conditions. Large, market-wide, economic downturns are one of the great shake-ups that could generate just these conditions for an entrant. The economy contracts, firms drop out, customers drop out, but hopefully recovery follows. This means demand growth is now present, and a bunch of customers have been freed from switching costs that kept them with the incumbent. The entrant who can grab these customers returning to the economy might have a better shot at gaining market share in the presence of network effects than pre-recession. There is a glimmer of opportunity to be found in this recession. Of course, this is conditional on being able to hold out doing something else during the recession until the economy expands again.

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2 Responses to For whom the recession does not toll.

  1. Pierluigi "Cino" Molajoni says:

    Would this mechanism be but one example under the broad “creative destruction” mentioned by Schumpeter?

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