Local labor market frictions and platform‐based entrepreneurship

Abstract Research Summary Building on prior research about the heterogeneous impact of labor shocks on individuals' propensity to start businesses, we explore how local labor market frictions affect individuals' selection into platform‐based entrepreneurship. Combining detailed data from a large online retail platform with sectoral employment statistics across labor market areas in the United States, we show that entrepreneurs entering the platform during larger local employment declines in related sectors developed more effective customer strategies and maintained stronger sales performance. These entrepreneurs focused more on customer appeal, matched social media channels with the platform's predominant user base, and lowered prices over time. Managerial Summary This article examines how local labor market frictions in sectors relevant to a digital platform shape the heterogeneous entry of individuals into platform‐based entrepreneurship—a class of entrepreneurship that became popular with “creator economy” business models where individuals rely on digital infrastructures to access potential customers and monetize their creative labor. We find that entrepreneurs who started platform‐based businesses in deteriorating local employment conditions generated significantly higher sales by being more attuned to customers' needs and wants. We show that these entrepreneurs emphasized customer‐related activities, chose more effective social media channels, and set lower prices after operating for a few periods. Our findings highlight the importance of customer‐related competitive advantages in platform‐based entrepreneurship.