Competing by Restricting Choice: The Case of Search Platforms
AbstractSeminal papers recommend that platforms in two-sided markets increase the number of complements available. We show that a two-sided platform can successfully compete by limiting the choice of potential matches it offers to its customers while charging higher prices than platforms with unrestricted choice. Starting from microfoundations, we find that increasing the number of potential matches not only has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents with heterogeneous outside options resolve the trade-o_ between the two effects differently. For agents with a lower outside option, the competitive effect is stronger than the choice effect. Hence, these agents have higher willingness to pay for a platform restricting choice. Agents with a higher outside option prefer a platform offering unrestricted choice. Therefore, the two platforms may coexist without the market tipping. Our model helps explain why platforms with different business models coexist in markets, including on-line dating, housing and labor markets.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-098.
Length: 42 pages
Date of creation: Mar 2010
Date of revision: Jan 2013
matching platform; indirect network effects; limits to network effects;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-29 (All new papers)
- NEP-COM-2010-05-29 (Industrial Competition)
- NEP-GTH-2010-05-29 (Game Theory)
- NEP-NET-2010-05-29 (Network Economics)
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- Guillaume Roger & Luis Vasconcelos, 2012.
"Platform Pricing Structure and Moral Hazard,"
Economics Discussion Papers
738, University of Essex, Department of Economics.
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