Willingness to PayPal: Network Effects in Disruptive Innovation

Abstract

We extend the literature on disruptive innovation by focusing on different dimensions of demand complementarity that can be exploited by the incumbents and disruptive entrants through their respective business models. While disruptive entrants may not be able to imitate the incumbents in exploiting within-customer demand complementarity (e.g., by offering a variety of products or services) to increase their value proposition to mainstream customers, they may exploit between-customer demand complementarity by offering products or services with network effects to attract customers in niche segments. Over time, the network effects may even attract mainstream customers to the entrants’ products or services, thereby disrupting the incumbents’ business. To test these ideas, we leverage an exogenous addition of a bus line in Manhattan, New York City, that unintentionally extended the reach of subway commuters from Brooklyn neighborhoods with a large unbanked population and a high FinTech payment adoption rate to neighborhoods in Manhattan. We find that the addition of the bus line was positively associated with the numbers of commuters from Brooklyn to the treated Manhattan neighborhoods. In addition, restaurants near the new bus stops or those in neighborhoods that experienced a reduction in travel time from Brooklyn saw a higher percentage of their customers using FinTech payment apps (e.g., PayPal), whereas local bank branches experienced a decrease in bank visits. However, the decrease in bank visits was less for (1) local bank branches that offered products or services with greater potential within-customer demand complementarity (e.g., those offered a broader scope of services, including loans and financial advisory services in addition to payment), and (2) local branches of banks that had preemptively provided offerings with network effects (e.g., those that had joined the Zelle platform).

Speaker Biography

Yue Maggie Zhou is a professor of strategy at the Ross School of Business, University of Michigan. Her research is in the areas of corporate strategy, competitive strategy, institutional strategy and organizational structure. Her recent studies investigate the role of task complexity and competing institutional demands in setting limits to firm growth, the use and effects of competitive strategies between firms on and off digital platforms and within technological ecosystems, as well as organizational design for domestic and multinational corporations. In addition to theoretical models, she has examined these issues in a broad range of empirical settings including air transportation, commercial spaceflight, electricity, fintech, healthcare, manufacturing, oil and gas, restaurant, rideshare, soft drink, and solar photovoltaic installation industries. Her work has been published in the Strategic Management Journal, Management Science, Organization Science, Strategy Science, Journal of Corporate Finance, and Advances in Strategic Management. She is an Associate Editor for Management Science and Strategic Management Journal. She also serves on the editorial boards of Organization Science and Strategy Science.

Professor Zhou has taught economics and strategy courses to BBA, MBA, and executives students for more than 15 years. She received the Neary Teaching Excellence Award for the weekend MBA program at Ross in 2024 and the same award for the PhD Program at Ross in 2019. Prior to joining the University of Michigan, she taught microeconomics and international economics at the University of Maryland as an Assistant Professor.

Professor Zhou has a B. Eng. from Shanghai Jiaotong University, an MBA from the University of Maryland, and a PhD from the University of Michigan where she also earned the Gerald and Lilian Dykstra Fellowship for teaching excellence as a doctoral student.

Prior to her academic career, Professor Zhou worked at Arthur Anderson as a financial auditor and at the International Finance Corporation of the World Bank Group as an Investment officer on privatization transactions in Africa, Asia, and Eastern Europe.