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Competing by Restricting Choice: The Case of Search Platforms

45 Pages Posted: 18 May 2010 Last revised: 2 Sep 2016

Hanna Halaburda

Bank of Canada; New York University (NYU); CESifo (Center for Economic Studies and Ifo Institute)

Mikolaj Jan Piskorski

IMD

Pinar Yildirim

University of Pennsylvania - The Wharton School

Date Written: July 17, 2016

Abstract

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

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

Hanna Halaburda (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

Mikolaj Jan Piskorski

IMD ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

Pinar Yildirim

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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