Competing by Restricting Choice: The Case of Search Platforms
Bank of Canada
Mikolaj Jan Piskorski
January 12, 2013
Harvard Business School Strategy Unit Working Paper No. 10-098
Seminal papers recommend that platforms in two-sided markets increase the number of complements available. We show that a two-sided platform can successfully compete by limiting the choice of potential matches it offers to its customers while charging higher prices than platforms with unrestricted choice. Starting from microfoundations, we find that increasing the number of potential matches not only has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents with heterogeneous outside options resolve the trade-off between the two effects differently. For agents with a lower outside option, the competitive effect is stronger than the choice effect. Hence, these agents have higher willingness to pay for a platform restricting choice. Agents with a higher outside option prefer a platform offering unrestricted choice. Therefore, the two platforms may coexist without the market tipping. Our model helps explain why platforms with different business models coexist in markets, including on-line dating, housing and labor markets.
Number of Pages in PDF File: 42
Keywords: matching platform, indirect network effects, limits to network effects
JEL Classification: C7, D8
Date posted: May 18, 2010 ; Last revised: April 30, 2013
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