How Users Drive Value in Two-sided Markets: Platform Designs that Matter

Abstract

The extant research has popularized the perspective that strong network effects produce “winner-take-all” outcomes, which leads platforms to invest in user growth and encourages investors to subsidize these platforms. However, user growth does not necessarily imply strong user stickiness. Without user stickiness, strong network effects in the current period may fade in future periods, thus rendering a user growth strategy ineffective. By adding a time dimension to the network effects, we develop a model of cross-period and within-period network effects to explain how different types of network effects drive value. We emphasize that the cross-period same-side network effect contributes to user stickiness, while the within-period cross-side network effect persists conditional on user stickiness. We propose that one reason for platforms having heterogeneous cross-period same-side network effects is because of the “product learning” mechanism: it is expected that products with higher uncertainty have a stronger cross-period same-side network effect. Using Groupon data, we verify our insight and discuss platform design choices that enhance user stickiness when the cross-period same-side network effect is weak.

Keywords: two-sided markets, network effects, a user growth strategy, winner-take-all, customer lifetime value, platform design, user stickiness, product learning

JEL Classification: C22, D46, D70, D90, L10, M21