Competing by Restricting Choice: The Case of Search Platforms
Bank of Canada; New York University (NYU); CESifo Institute
Mikolaj Jan Piskorski
University of Pennsylvania - The Wharton School
July 17, 2016
Harvard Business School Strategy Unit Working Paper No. 10-098
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 micro-foundations, we derive the strength and direction of network eﬀect, and 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 may help explain why platforms with diﬀerent business models coexist in markets using the stylized model of online dating.
Number of Pages in PDF File: 45
Keywords: matching platform, indirect network effects, limits to network effects
JEL Classification: C7, D8
Date posted: May 18, 2010 ; Last revised: September 2, 2016
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