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

62 Pages Posted: 25 Aug 2020 Last revised: 15 Jun 2021

See all articles by Zhou Zhou

Zhou Zhou

City University of Hong Kong -- College of Business

Lingling Zhang

University of Maryland - Department of Marketing

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Date Written: June 12, 2020

Abstract

Extant research has popularized the perspective that strong network effects produce “winner-take-all” outcomes. This leads platforms to invest in user growth and encourages investors to subsidize them. However, without user stickiness, strong network effects in the current period may fade in future periods, so a user growth strategy is not effective. 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 to be conditional on user stickiness. We theorize that one reason platforms have heterogeneous cross-period same-side network effects is because of the "product learning" mechanism: products with higher uncertainty can expect a higher cross-period same-side network effect. Using Groupon data, we verify our theoretical 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

University of Maryland - Department of Marketing ( email )

College Park, MD 20742
United States

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( 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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