Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger

40 Pages Posted: 9 Nov 2020 Last revised: 21 Aug 2022

See all articles by Chiara Farronato

Chiara Farronato

Harvard University; National Bureau of Economic Research (NBER)

Jessica Fong

University of Michigan Ross School of Business

Andrey Fradkin

Boston University

Date Written: November 2020

Abstract

Digital platforms are increasingly the subject of regulatory scrutiny. In comparison to multiple competitors, a single platform may increase consumer welfare if network effects are large or may decrease welfare due to higher prices or reduction in platform variety. We study the net effect of this trade-off in the context of the merger between the two largest platforms for pet-sitting services. We exploit variation in pre-merger market shares and a difference-in-differences approach to causally estimate network effects at the platform and market level. We find that consumers are, on average, not substantially better off with a single combined platform than with two separate and competing platforms. On one hand, users of the acquiring platform benefited from the merger because of network effects. On the other hand, users of the acquired platform experienced worse outcomes. Our results highlight the importance of platform differentiation even when platforms enjoy network effects.

Suggested Citation

Farronato, Chiara and Fong, Jessica and Fradkin, Andrey, Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger (November 2020). NBER Working Paper No. w28047, Available at SSRN: https://ssrn.com/abstract=3727123

Chiara Farronato (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jessica Fong

University of Michigan Ross School of Business ( email )

701 Tappan Ave
Ann Arbor, MI 48109
United States

Andrey Fradkin

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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