Competing by Restricting Choice: The Case of Search Platforms

Hanna Halaburda and Mikolaj Jan Piskorski ()
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Mikolaj Jan Piskorski: Harvard Business School, Strategy Unit

No 10-098, Harvard Business School Working Papers from Harvard Business School

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.

Keywords: matching platform; indirect network effects; limits to network effects (search for similar items in EconPapers)
JEL-codes: C7 D8 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-03, Revised 2013-01
New Economics Papers: this item is included in nep-com, nep-gth and nep-net
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:10-098

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