Dynamic Resource Allocation on Multi-Category Two-Sided Platforms

Forthcoming, Management Science

54 Pages Posted: 27 Jan 2020

See all articles by Hui Li

Hui Li

Carnegie Mellon University

Qiaowei Shen

Peking University - Guanghua School of Management

Yakov Bart

Northeastern University - D'Amore-McKim School of Business

Date Written: December 27, 2019

Abstract

Platform businesses are typically resource-intensive and must scale up their business quickly in the early stage to compete successfully against fast-emerging rivals. We study a critical question faced by such firms in the novel context of multi-category two-sided platforms: how to optimally make investment decisions across two sides, multiple categories, and different time periods to achieve fast and sustainable growth. We first develop a two-category two-period theoretical model and propose optimal resource allocation strategies that account for heterogeneous within-category direct and indirect network effects and cross-category inter-dependence. We find that the proposed strategy shares the spirit of the allocation rules for multi-product non-platforms firms and single-product platform firms, yet it does not amount to a simple combination of the existing rules. Interestingly, the business model that platforms adopt crucially determines the optimal strategy. Platforms that charge by user should adopt a “reinforcing” rule for both within- and cross-category allocations by allocating more resources toward the stronger growth driver. Platforms that charge by transaction should also adopt the “reinforcing” rule for within-category allocation, but follow a “compensatory” rule for cross-category and intertemporal allocations by allocating more resources toward the weaker growth driver. We use data from the daily deals industry to empirically identify the network effects, propose alternative allocation strategies stemming from our theoretical findings, and use simulations to show the benefits of these strategies. For instance, we show that re-allocating 10% of the average observed investment from Fitness to Beauty can increase profits by up to 15.5% for some cities.

Keywords: dynamic resource allocation, two-sided platform, business model, network effects, daily deals

Suggested Citation

Li, Hui and Shen, Qiaowei and Bart, Yakov, Dynamic Resource Allocation on Multi-Category Two-Sided Platforms (December 27, 2019). Forthcoming, Management Science, Available at SSRN: https://ssrn.com/abstract=3514513

Hui Li (Contact Author)

Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Qiaowei Shen

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Yakov Bart

Northeastern University - D'Amore-McKim School of Business ( email )

Boston, MA 02115
United States

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