This study provides a dynamic model and analyzes its process that may plunge the business ecosystem into ToC (the Tragedy of the Commons). When developing the model, we have in mind some industries where the marketing competition to secure a large installed base is intense. The social commerce industry is a representative example of this type of industries, but the scope of this study is not limited to the industry. We first introduce a previous study focusing on the static Nash equilibrium, and then present an extended version of the basic model in a dynamic perspective. According to our analyses on the dynamic equilibria together with their stability, there may be a unique interior equilibrium, but it is highly likely unstable. In addition, possible (near) boundary equilibria are also unstable for a wide range of parameter values. We also conduct some numerical experiments and discover cycles as solutions to some particular instances. Since those cycles contain the ToC traps, a policy measure or regulation may need to be employed. Our approach and results will help to figure out a clue to escape from the ToC trap, thereby shedding new light on the sustainable growth of the business ecosystem, which is prone to excessive marketing competition.
As the mobile services and SNS (social network service) are becoming the most common and popular media to access and use the Internet, they are rapidly replacing PCs and other types of information devices dedicated to serve a specific purpose. Information flows through social media keep increasing and will change the way of organizing and leading businesses and industries. For example, marketing practice has entered a new horizon, where mobile social media plays a central role in firms’ marketing campaign and reduces the entry barrier by expanding the spheres of activities and lowering the access costs. One can find representative cases in the social commerce industry which utilizes social media as a commercial platform. It is not surprising to discover a strong incentive to construct a business model with Facebook and Twitter, each of which retains more than 1 billion and 5,000 million users over the globe, respectively.
Despite their tremendous success in creating new service markets and expanding the business areas, SNS platforms and other e-commerce providers based on social media face many challenges in practice. In particular, the social commerce providers have experienced rise and fall over a short period of time right after their beginning (MacMillan [
These problems and challenges are not found only in the social commerce area. In effect, when innovators and pioneers plan to monetize eyeballs, they are likely to be exposed to the risk that arises from those problems. In that sense, the issue may be generally embedded or innate property of many business areas, which directly or indirectly depend on the installed base (Kumar and Rajan [
If this is the case, the entire industry is highly likely to plunge into a marketing competition, where each player competes to expand its prospective installed base by reinforcing marketing activities in a broad sense. SNS, social commerce, online/mobile games, telecom services, and many ICT business areas experience and suffer from marketing wars fighting for customers and users.
One of the major backgrounds of the marketing competition comes from the cost structure of the corresponding industry. For example, a low entry barrier as in the case of social commerce (Anderson et al. [
However, it is not easy to find analytical studies about the marketing competition of this kind. One major reason for the meager literature on this inherent weakness of the marketing-intensive industries can be found in a tradition of economic studies. That is, firms and providers are typically assumed to seek for the profit, not for the market share. But, recent changes occurring across the broad range of industries defy this tradition. One of them is fusion or convergence across multiple industries, which conceals the exact financial gain of a company participating in a business ecosystem built upon multiple industries. Another big change is referred to as “servicification,” which emphasizes the trend that services are increasingly essential as both inputs and outputs in many industries including even traditional manufacturing areas such as automobile and consumer electronics (Lodefalk [
This study suggests a modeling framework for and conducts analysis of the marketing-intensive industries vulnerable to the risk of collapse due to excessive competition to expand the installed base. Such industries are prone to getting mired in marketing wars due to inherent properties in the business model itself (Though we started this section with mentioning the social media industry as one of representative instances that fit our model assumptions, the application scope of our approach will not be confined to social media and other ICT industries). We first develop a stylized business model that captures the essential features of the competition process. Our approach focuses on the relationship between key decision issues such as marketing inputs and market value. As more providers join the industry thanks to the low entry barrier, they are inevitably faced with fierce competition. This may lead to sharp increase in the expenditure related to marketing and advertising activities in a broad sense. This type of competition may lead the industry away from its optimal development path and, at worst, toward a collapse of the entire business ecosystem as described in some ICT business cases above.
Having such a case, the situation that we will deal with in this study resembles ToC (the tragedy of the commons; Alroy [
In one of the previous researches on this subject, Kim [
This paper is organized as follows. The next section introduces the basic model and static analysis. Section
Let us suppose a player set composed of
In our model, SC providers are assumed to be horizontally differentiated according to their marketing capabilities, which is the major factor characterizing the providers. We employ
In each time period, the entire value of the SC market,
Second, the entire value of the SC market is also affected by environmental factors such as consumer preference change and technological development. We abbreviate these environmental factors into
As
The market value
This section introduces Nash equilibria of the static model based on the previous study of Kim [
For readability, one omits
Omitted (for proof, see Kim’s study [
Proposition
Let one considers the situation where all the providers are homogeneous in the sense of
Omitted (for proof, see Kim’s study [
In the case of homogeneous players, we have much simpler expressions for the equilibrium strategies as above. First note that all the homogeneous players join the market or leave the market at the same time. Thus,
Now, we will extend the basic model together with its context from a new dynamic perspective. The analytical results above have been derived under the assumption that a certain number of providers (
First note that it is natural as well as practical to set up the circumstances where the (potential) providers know only the parameter values in the last period. If this is the case, then the active providers try to predict the total marketing efforts
According to Proposition
Plugging ((
According to the system dynamics described in ((
Let us first define a positive constant
Suppose that both
The interior equilibrium comes from the solution of the following simultaneous equation system:
Suppose that
In this proof, we suppress the time index
Now, using the facts that
The proof needs to be complemented since Proposition
Regions of the
Proposition
Since the
The following two states are (near) boundary fixed point equilibria (compatible with the static model as in Proposition
It is easy to show that the two states asserted above become Nash equilibria in the sense compatible with Proposition
In order to show the instability of
One can apply a similar procedure to the case of the boundary equilibrium
First note that the near boundary equilibrium
On the other hand, the instability of the complete prosperity presents a bad news. As shown in the proof, a small perturbation occurring around the boundary state may lead the system away from the ideal situation. This system behavior probably comes from the mechanism around the saturation state
These results suggest that
Even though it is true that our system behavior has the property of natural resilience from deterioration, it may stay at the states near a collapse over a long period of time. Thus, we need to develop a policy measure that protects the system from moving toward the collapse and establishes a locally stable positive equilibrium that attracts system trajectories generated around it. If it is successful, the market and the industry will not only be sustained but also stabilized over time at some desirable states. We will also deal with this issue in the next section.
We conduct some numerical simulations in order to examine more thoroughly the system behaviors in various scenarios. In our simulations, both
As Propositions
Experimental example. Here,
As raised in the previous section, a cycle or a sequence of periodic points seems to constitute a solution to our dynamic equations. In fact, the emergence of the ToC trap and the oscillation dynamics are neither a new phenomenon nor an unusual feature in dynamic models, particularly on the basis of structured interactions among agents (e.g., Perc and Szolnoki [
A cycle example. Here, all the parameters remain the same as the ones in Figure
Moreover, Figure
Behaviors of key attributes of system. Here, all the parameters and the initial states remain the same as the ones in Figure
If this is the most common case then the remaining issue should be related to the ToC trap which seems inevitable in the cycle. In particular, we need to develop a remedy (a policy measure) to cope with ToC. One possible way to pursue is to introduce a regulation that makes providers keep the marketing efforts at their reasonable levels (probably coupled with their cost efficiencies). We may also implement a policy that puts some barriers to preserve a minimum level of the market maturity. Figure
Experimental example, with a barrier to sustain the market. Here, all the parameters and the initial states remain the same as the ones in Figure
This study examined the possibilities of a disruption of a business ecosystem, so-called the ToC trap, which describes the situation where the total marketing efforts
However, the analytical results and implications have been established on the basis of our modeling assumptions, and they may not be generalized into all the situations. In particular, our assumption of perfectly mixed (or randomized) interactions among the players is not a fully realistic one. This remains as one of the limitations of our model and approach. Thus, it will be an obviously interesting direction of our next research step to extend the proposed game model with a structured population of providers (for benchmarking studies, refer to Szolnoki et al. [
In our future works, we will also refine policy measures that were derived in the course of implementing our suggestions to alleviate the risk of the ToC trap. We will incorporate various regulatory schemes and other policy ideas (e.g., Greely [
The author declares that there is no conflict of interests regarding the publication of this paper.