Dog Eat Dog: Balancing Network Effects and Differentiation in a Digital Platform Merger

Chiara Farronato (), Jessica Fong () and Andrey Fradkin ()
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Chiara Farronato: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Jessica Fong: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Andrey Fradkin: Questrom School of Business, Boston University, Boston, Massachusetts 02215

Management Science, 2024, vol. 70, issue 1, 464-483

Abstract: Network effects are often used to justify platform strategies such as acquisitions and subsidies that aggregate users to a single dominant platform. However, when users have heterogeneous preferences, a single platform may not be as effective as multiple platforms from both a strategic perspective and an antitrust perspective. We study the role of network effects and platform differentiation in the context of a merger between the two largest platforms for pet-sitting services. To obtain causal estimates of network effects, we leverage geographic variation in premerger market shares and employ a difference-in-differences approach. Our results reveal that although users of the acquiring platform benefit from the merger thanks to network effects, those of the acquired platform are comparatively worse off because their preferred option is removed. Network effects and differentiation offset each other such that at the market level, users are not substantially better off with a combined platform than with two separate platforms. These findings have strategic and regulatory implications as well as highlight the importance of platform differentiation even in the presence of network effects.

Keywords: mergers and acquisitions; two-sided platforms; peer-to-peer markets; network effects; platform growth; antitrust (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:464-483

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