Composition Effects in Platforms with Population Heterogeneity

51 Pages Posted: 30 Sep 2019 Last revised: 6 Nov 2019

See all articles by Michael Sacks

Michael Sacks

University of Louisville - College of Business - Department of Economics

Date Written: November 5, 2019

Abstract

I develop a duopoly model of competition between platforms, incorporating users with heterogeneous preferences over both the platforms' characteristics and the presence of other users. Hence platforms are concerned with both the number and composition of users. The model yields novel representations of heterogeneity, size effects, and composition effects. I use these representations to decompose the relationship between the price and the size and composition of a platform. Prices need not be monotonic in the size of the installed base and profitability can similarly vary inversely. I identify conditions under which prices are increasing, decreasing, or unchanging in platform size. Given that users care about composition, nonpricing strategies to cultivate platform composition emerge when platforms cannot sufficiently leverage price discrimination. Composition effects and cultivation reframe the dominant-firm fringe-firm paradigm and explain the presence of multiproduct firms in platform markets, such as online dating.

Keywords: equilibrium selection, network effects, networks, platforms, price competition, price dispersion, product differentiation

JEL Classification: D2, L1, L2, M3, Z1

Suggested Citation

Sacks, Michael, Composition Effects in Platforms with Population Heterogeneity (November 5, 2019). Available at SSRN: https://ssrn.com/abstract=3461023 or http://dx.doi.org/10.2139/ssrn.3461023

Michael Sacks (Contact Author)

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States

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