Abstract

http://ssrn.com/abstract=1677624
 
 

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When Does a Platform Create Value by Limiting Choice?


Ramon Casadesus-Masanell


Harvard University - Strategy Unit

Hanna Halaburda


Bank of Canada

November 9, 2012

Harvard Business School Strategy Unit Working Paper No. 11-030

Abstract:     
We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (to better satisfy their individual preference for variety, users have an incentive to consume more applications than the number that maximizes joint utility); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems and create value by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the allocation that maximizes users' utility); eliminate equilibria that give lower utility to the users; and reduce the severity of the coordination problem faced by users.

Number of Pages in PDF File: 46

Keywords: platform governance, direct network effects, indirect network effects, complements, tragedy of the commons, equilibrium selection, coordination, foresight

JEL Classification: D21, D42, L12, L82, L86

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Date posted: September 18, 2010 ; Last revised: November 10, 2012

Suggested Citation

Casadesus-Masanell, Ramon and Halaburda, Hanna, When Does a Platform Create Value by Limiting Choice? (November 9, 2012). Harvard Business School Strategy Unit Working Paper No. 11-030. Available at SSRN: http://ssrn.com/abstract=1677624 or http://dx.doi.org/10.2139/ssrn.1677624

Contact Information

Ramon Casadesus-Masanell
Harvard University - Strategy Unit ( email )
Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-496-0176 (Phone)
617-496-5859 (Fax)
HOME PAGE: http://www.people.hbs.edu/rmasanell
Hanna Halaburda (Contact Author)
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
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