Platform Competition under Network Effects: Piggybacking and Optimal Subsidization

Forthcoming in Information Systems Research

38 Pages Posted: 1 Feb 2018 Last revised: 1 Mar 2021

See all articles by Yifan Dou

Yifan Dou

Fudan University - School of Management

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business

Date Written: January 4, 2021

Abstract

A repeated challenge in launching a two-sided market platform is how to ignite the cross-side network effects to jumpstart adoption. Prior literature often addresses this issue by using pricing controls – a high price on one side to raise the margin and a low price on the other to attract users – or the “seesaw principle.” More recently, platforms are increasingly embracing non-pricing controls to accelerate user adoptions. Little is known, however, about the role of non-pricing controls and their interplay with pricing controls. In this research note, using a game-theoretic framework, we study “piggybacking” – i.e., expanding the focal market to recruit exclusive users from external networks – as a new and non-pricing control to launch platforms in conjunction with pricing controls. We first consider consumer-side piggybacking. In a standard “competitive bottlenecks” setting where consumers single-home and providers multi-home, we provide a rich set of novel insights into strategies that platforms use to monetize exclusive access to external users, with non-trivial characterizations of the interplay among piggybacking, cross-side network effects, and price competition. We identify necessary and sufficient conditions when piggybacking is profit improving and when it leads to a prisoner’s dilemma, depending on the piggybacking cost and strengths of cross-side network effects. Among others, we show that if the platforms’ equilibrium strategies were to subsidize consumers (when provider-side network effects are stronger than consumer-side network effects), piggybacking may intensify rather than ease price competition. In contrast, if the platforms’ equilibrium strategies were to subsidize providers (when provider-side network effects are weaker than consumer-side network effects), piggybacking may ease price competition. Interestingly, piggybacking reinforces the seesaw principle for the piggybacking platform. We provide a full characterization on such non-trivial equilibrium outcomes. We then consider provider-side piggybacking, and we show that the insights are qualitatively the same as consumer-side piggybacking except that the prisoner’s dilemma disappears if piggybacking providers multi-home. Managerial implications for platform practitioners are also discussed.

Keywords: Analytical Modeling, Economics of IS, Network Effects, Piggybacking, Platform Competition, Pricing, Subsidization

Suggested Citation

Dou, Yifan and Wu, D. J., Platform Competition under Network Effects: Piggybacking and Optimal Subsidization (January 4, 2021). Forthcoming in Information Systems Research, Available at SSRN: https://ssrn.com/abstract=3109183 or http://dx.doi.org/10.2139/ssrn.3109183

Yifan Dou (Contact Author)

Fudan University - School of Management ( email )

670 Guoshun Rd
Yangpu District
Shanghai, Shanghai 200433
China

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )

800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/wu

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
397
Abstract Views
1,765
rank
89,226
PlumX Metrics