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Competing by Restricting Choice: The Case of Search Platforms

Author

Listed:
  • Hanna Halaburda

    () (Bank of Canada)

  • Mikolaj Jan Piskorski

    () (Harvard Business School, Strategy Unit)

Abstract

Seminal 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.

Suggested Citation

  • Hanna Halaburda & Mikolaj Jan Piskorski, 2010. "Competing by Restricting Choice: The Case of Search Platforms," Harvard Business School Working Papers 10-098, Harvard Business School, revised Jan 2013.
  • Handle: RePEc:hbs:wpaper:10-098
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    Cited by:

    1. Karle, Heiko & Peitz, Martin & Reisinger, Markus, 2017. "Segmentation versus Agglomeration: Competition between Platforms with Competitive Sellers," CEPR Discussion Papers 12435, C.E.P.R. Discussion Papers.
    2. Neil Gandal & Hanna Halaburda, 2014. "Competition in the Cryptocurrency Market," Working Papers 14-17, NET Institute.
    3. Guillaume Roger & LuĂ­s Vasconcelos, 2014. "Platform Pricing Structure and Moral Hazard," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(3), pages 527-547, September.
    4. repec:esx:essedp:738 is not listed on IDEAS
    5. He, Yinghua & Magnac, Thierry, 2017. "A Pigouvian Approach to Congestion in Matching Markets," TSE Working Papers 17-870, Toulouse School of Economics (TSE).
    6. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    7. David S. Evans & Richard Schmalensee, 2013. "The Antitrust Analysis of Multi-Sided Platform Businesses," NBER Working Papers 18783, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    matching platform; indirect network effects; limits to network effects;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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