Myopic Expansions on Digital Platforms

Digitization has enabled modern firms to expand at unprecedented rates, but there are downsides to rapid expansion. Prior research has highlighted how digital platforms facilitate mass-market expansions by resolving frictions associated with market entry. Accordingly, various studies have emphasized the positive impact of market-friction reduction on aggregate market size and efficiency. In this article, the authors argue that the extreme resolution of frictions may also have a downside: It can nudge platform participants to overlook the heterogeneous nature of different markets and, consequently, to engage in large-scale, potentially myopic market expansions. These expansions, in turn, may engender lower customer satisfaction and firm performance. They test their arguments in the context of Apple’s App Store. They find that apps that undergo rapid, large-scale market expansions, relative to apps that do not expand or that expand more gradually, see a short-run increase in client base but longer-run declines in ratings, downloads, financial performance, and innovation. By addressing the underexplored negative side of resolving market frictions on platforms, the study advances knowledge of digital strategy and scaling.