How Users Drive Value: Platform Investments that Matter
46 Pages Posted: 25 Aug 2020
Date Written: June 12, 2020
Extant research has popularized the perspective that strong network effects produce “winner-take-all” outcomes. This leads platforms to grow their user bases and encourages investors to subsidize them. Platforms with large user bases, however, have both succeeded and failed. Central questions for investors and managers are then: When is a large user base insufficient to dominate a market and how do investments in users drive platform value? In answer, we develop a model of inter-temporal effects and within-period network effects. The within-period effect only yields contemporaneous user attraction, while the inter-temporal effect contributes to user stickiness across periods. Strong within-period network effects that do not persist across periods can stall platform value. Using Groupon panel data, we empirically estimate these two effects on users' participation choices. Our results show that Groupon has a moderately strong attraction within a period but weak attraction across periods. Reduced stickiness lowers user value. Using model parameters, we then compare various investment strategies to increase platform value. In our context, common marketing practices to attract customers offer inferior returns compared to platform design investments that increase stickiness. Overall, these findings remind managers not to overemphasize user acquisition marketing when network effects do not persist and instead focus on platform design.
Keywords: platform value, platform design, network effects, winner-take-all, user base, stickiness, user acquisition, investment, system generalized method of moments
JEL Classification: C22, D46, D70, D90, L10, M21
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