45 Pages Posted: 18 May 2010 Last revised: 2 Sep 2016
Date Written: July 17, 2016
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.
Keywords: matching platform, indirect network effects, limits to network effects
JEL Classification: C7, D8
Suggested Citation: Suggested Citation
Halaburda, Hanna and Piskorski, Mikolaj Jan and Yildirim, Pinar, Competing by Restricting Choice: The Case of Search Platforms (July 17, 2016). Harvard Business School Strategy Unit Working Paper No. 10-098. Available at SSRN: https://ssrn.com/abstract=1610187 or http://dx.doi.org/10.2139/ssrn.1610187
By Minjae Song