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Decomposing the Congestion Effect and the Cross-Platform Effect in Two-Sided Networks: A Field Experiment

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Abstract

This paper highlights how the provision of information about user participation can serve as a strategic marketing tool for firms seeking to grow two-sided exchange networks. A two-sided exchange network is a business model (such as Ebay or Craiglist) where revenue is generated from persuading people to buy and sell items through that particular exchange. It is not immediately clear whether broadcasting information about the number of sellers will grow further seller participation. On the one hand, a strong rival presence may dissipate payoff (a ``congestion effect''). On the other hand, a large number of rivals may signal high buyer demand (a ``cross-platform effect''). We use field experiment data from a B2B web site that brings together buyers and sellers of used equipment and real estate. Before each seller made a posting request, the web site randomized whether to disclose the number of buyers and/or sellers, and the exact number to disclose. We find that when presented together with the number of buyers, a larger number of sellers makes sellers less likely to list their products, indicating a negative congestion effect. However, when the number of sellers is presented in isolation, its negative impact on entry is significantly reduced, indicating a positive cross-platform effect. Higher buyer search intensity amplifies the moderating role of demand uncertainty. The results suggest that information on the number of users can be an effective tool to grow two-sided networks but should be used strategically. A network can attract more users by advertising dense competition when demand is not transparent, especially in search-intensive markets.

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File URL: http://www.netinst.org/Tucker_Zhang_08-12.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-12.

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Length: 30 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:net:wpaper:0812

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Web page: http://www.NETinst.org/

Related research

Keywords: Network Effects; Local Networks; Stability; Option-Value;

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