Since the founding of the first bike-sharing company (ofo) in Beijing in 2015, bike-sharing has become a popular means of transportation in many cities. One of the factors that made bike-sharing popular is the positive network effects, because a user who rides a bike from A to B makes the bike available for the next rider at point B. It no longer requires fixed docks at the origin and destination of a trip, which addresses the potential imbalance of supply and demand in different places at different moments.
Given these network effects, we document the effect of entry on the incumbent bike-sharing business with a special focus on market-stealing and market expansion. An entrant can steal the market by attracting existing users away from the established companies or expand the market by inducing new users. We focus on the first two years of the Chinese bicycle-sharing industry (from 2015 to 2017), when many Chinese cities were de facto a monopoly or duopoly in bicycle sharing, depending on whether ofo and the second participant, Mobike, entered the city.
Simple regressions suggest that Mobike's entry has expanded the market for ofo, increasing ofo's rides by 40.8% and ofo's average income per trip by 0.041 RMB (listing price is 1 RMB per trip). When we separate new and old users within ofo, we find that Mobike entry has reduced the percent of old users that remain active on ofo, but this market-stealing effect is dominated by expansion in new users. As bike-sharing firms can directly influence the network size by bike investment, analysis suggests that ofo has put more bikes in the markets after Mobike entry. More importantly, ofo's bike utilization rate – measured by the number of trips per ofo bike per day – has increased significantly upon Mobike entry, which cannot be explained by the incumbent responding to entry by aggressive and wasteful investment.
The positive effect of entry also occurs geographically: we find Mobike entry helps ofo bikes to expand in the city, and the distribution of ofo bikes has become more evenly distributed. In addition, the entry has the greatest effects in the grids with the highest population density or the highest light intensity in the evening. These patterns, along with the long-lasting survival of Mobike, suggest that the incumbent and entrant can co-exist in a market with positive network effects and multi-homing users.
The positive effect of entry on the incumbent raises three immediate questions. First, what mechanism leads to the overall market expansion for the incumbent? Second, why didn't the incumbent expand the network as much by itself before the second firm entered? Third, why does the incumbent choose its post-entry investment such that the bike utilization rate is higher after the entry than before the entry?
To answer these questions, we examine bike-sharing in a stylized model of monopoly or duopoly. In both types of markets, consumers decide whether to look for a bike, given the price of each company and the expected probability of finding a bike. Companies also decide whether to invest in bicycles, which affects the likelihood of matching. Congestion creates a negative network effect, but if the matching technology shows increasing return to scale, it also creates a positive network effect.
Based on these network effects, we analyze equilibrium prices and bike investments in monopoly and duopoly cases. Under weak conditions, the model in the duopoly can predict higher prices than in the monopoly, as we see in the empirical data, but the comparison trade volum, bike investment and bike utilization rate depend on a few factors. The first factor is positive network effects modeled as a matching technology with increasing return to scale. When there is a significant increasing return in matching, duopoly competition will generate a market-expanding effect that is large enough to dominate the market-stealing effect. In this case, every duopolist has an incentive to invest more in bicycles than the monopolist. If the rising return is high enough, each duopolist could also have a higher rate of bicycle use than the monopolist.
Another factor is how investment costs per bicycle vary by the size of the fleet, where investment costs include purchase, maintenance, and repair costs. At constant costs per bicycle, the positive network effects would motivate the monopolist to invest in an infinite number of bicycles, so that there is no room for entry. If the cost per bike increases, every company must reconsider the reason for the expansion and the investment costs. If the investment costs (per company) are convex enough, two companies investing at the same time are more profitable than a single one. With an increasing return in matching, a competitor's investment also makes its investment more efficient, in terms of convincing more consumers to find and improve the matching rate. The monopolist alone cannot achieve the same efficiency as it has to bear the full costs to achieve the same order of magnitude, and managerial fixedcostsmake it difficult for a monopolist to split into two sub-companies in order to avoid size disadvantages in terms of variable costs.
In summary, using staggered entry of two dockless bike-sharing firms, we study whether the entrant expands or steals the market from the incumbent in 59 cities. Compared with 23 cities without entry, the entry helps the incumbent to serve more trips, make more bike investment, achieve higher revenue per trip, improve bike utilization, and form a wider and more dispersed network. The market-expanding effect on new users dominates a significant market-stealing effect on old users. These findings, plus a theory that highlights consumer search and network effects, suggest that a market with positive network effects and multi-homing users is not necessarily winner-takes-all.
Markets with positive network effects often trigger a concern of “winner-takes-all” or “winner-takes-most.” Positive network effects would enable the incumbent to become a natural monopoly and then abuse its monopoly power to the harm of consumers. However, for bike-sharing, entry creates positive spillovers on the incumbent, which helps the incumbent to better explore the positive network effects. This occurs for a couple of reasons. First, multi-homing consumers search for a generic bike, implying that one firm can motivate consumers to search but there is no guarantee that the search would lead to its own bike rather than the competitor's bike. Second, the cost of investing and maintaining a diverse network of bikes is convex, and thus it could be more cost-efficient to free ride on the competitor's investment than to make all the investment on its own. In our context, the spillovers are mutual, which explains why the entrant finds it worthwhile to enter even if the incumbent has already operated in a market with positive network effects, and why the incumbent is willing to share the (expanded) market with the entrant. Furthermore, our work highlights the importance of the outside good in a network market. Because entry could gen1erate market expansion, competition with the outside good is as important as within-market competition, for at least bike-sharing. These findings could have significant implications for policy makers, as they conduct merger reviews or consider entry policies in a market with positive network effects.
Market expansion and market-stealing are equally important for competition in a network market like bike-sharing. Some policy makers associate positive network effects with “winner-takes-all” because users in the incumbent network may be reluctant to switch to a new network, which tends to discourage entry and competition. This rationale emphasizes the market-stealing effect of entry. In contrast, we show that market expansion could dominate market-stealing, and the incumbent could benefit from competitive entry because of positive network effects. Because the potential of market expansion applies to many other network goods, our point on the importance of market expansion and market-stealing goes beyond bike-sharing.
About the authors
Weng Xi received his PhD degree in economics from University of Pennsylvania in 2011. Prior to that, he received his bachelor and master's degrees from Peking University, in 2004 and 2006, respectively. He is currently a tenured professor at Guanghua School of Management, Peking University. His research focused on microeconomic theory, in particular, game theory, information economics and organizational economics. His research has been published in top journals such as Journal of Finance, Management Science, Economic Journal, Journal of Economic Theory, International Economic Review, and American Economic Journal: Microeconomics.
Zhou Li-An is a Professor of Applied Economics at Guanghua. Dr. Zhou received his BA and MA in economics from Peking University, and his Ph.D. in economics from Stanford University. He joined Guanghua as an Assistant Professor in 2002 and became a full Professor in 2010. His research interests include political economy, industrial organization, economic development, and Chinese economy. Dr. Zhou has published papers in economics and management journals including American Economic Review, Review of Economics and Statistics, Journal of Public Economics, Economic Journal, Journal of Health Economics, and Strategic Management Journal. He is also the author of the book Incentives and Governance: China's Local Governments (Cengage Learning, 2010).