Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization
39 Pages Posted: 1 Feb 2018
Date Written: January 24, 2018
A repeated challenge in launching a two-sided market platform is how to solve the “chicken-and-egg” problem. The solution often suggested in the literature is subsidizing one side of the market to jumpstart adoption of the platform. In this paper, using a game-theoretic framework, we study piggybacking – importing users from external networks – as a new approach to launching platforms. First, in the presence of piggybacking, we solve for the platforms’ optimal pricing/subsidization strategies. Benchmarked with the case of no piggybacking, we find that, although piggybacking changes the degree of platform subsidization, it does not change the conditions for doing so. Second, we show that piggybacking can either intensify or mitigate price competition among platforms and we identify under which conditions each scenario happens. We also show when subsidization can complement piggybacking. Third, we show that these findings are robust to an extension when piggybacking is endogenized (i.e., external users need to be purchased). Finally, we depart from authentic piggybacking by examining fabricated piggybacking, that is, when imported external users (e.g., zombies or fake users) generate network effects but no revenue. We show that fabricated piggybacking, in contrast to authentic piggybacking, affects the platform’s subsidization conditions and undermines profits for the competing platform. Managerial implications for platform practitioners are also discussed.
Keywords: Analytical Modeling, Economics of IS, Network Effects, Piggybacking, Platform Competition, Pricing, Subsidization
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