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

51 Pages Posted: 20 Mar 2024 Last revised: 21 Mar 2024

See all articles by Zhou Zhou

Zhou Zhou

City University of Hong Kong -- College of Business

Lingling Zhang

China Europe International Business School

Marshall W. Van Alstyne

Boston University - Department of Management Information Systems; Massachusetts Institute of Technology (MIT) - Sloan School

Date Written: June 12, 2020

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

Suggested Citation

Zhou, Zhou and Zhang, Lingling and Van Alstyne, Marshall W., How Users Drive Value in Two-sided Markets: Platform Designs that Matter (June 12, 2020). Available at SSRN: https://ssrn.com/abstract=3625355 or http://dx.doi.org/10.2139/ssrn.3625355

Zhou Zhou (Contact Author)

City University of Hong Kong -- College of Business ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Lingling Zhang

China Europe International Business School ( email )

Hongfeng Road
Shanghai
China

Marshall W. Van Alstyne

Boston University - Department of Management Information Systems ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.bu.edu/mgmt_new/Profiles/VanAlstyneMarshall.html

Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Initiative on the Digital Economy
245 First St, Room E94-1521
Cambridge, MA 02142
United States
617-253-0768 (Phone)

HOME PAGE: http://web.mit.edu/marshall/www/home.html

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