Network Effects, Market Tipping, and the Emergence of Dominant Intermediated Markets in New Digital Categories

Abstract

Digital markets increasingly organize exchange through intermediated platforms that coordinate search, matching, payments, reputation, and post-transaction services. In many new digital categories, early fragmentation is followed by rapid concentration, and a single intermediary (or a small set) becomes the default locus of liquidity. This paper studies how network effects, expectation formation, and endogenous platform design jointly shape market tipping and the emergence of dominant intermediated markets. The analysis emphasizes that dominance is not mechanically implied by increasing returns; rather, tipping arises from a coupled system in which cross-side participation, perceived match quality, and governance-induced trust form complementary state variables. A dynamic model links adoption decisions to both contemporaneous participation and forward-looking beliefs about future liquidity, while allowing frictions such as multi-homing costs, switching costs, congestion, and platform learning. The framework clarifies the conditions under which multiple equilibria exist, when an unstable interior fixed point generates critical-mass dynamics, and how design levers such as ranking, subsidy allocation, and identity verification shift the basin of attraction toward a dominant equilibrium. The paper further characterizes dominance in categories where intermediation itself improves product definition, reduces measurement error in quality, and internalizes externalities through rules and enforcement. Empirical implications are developed for identifying network effects and tipping using observational data, highlighting pitfalls from reflection, simultaneity, and endogenous platform policy. Overall, the paper provides a technical account of why dominance is common but not inevitable in new digital categories.