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Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger

Chiara Farronato, Jessica Fong and Andrey Fradkin

No 28047, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Digital platforms are increasingly the subject of regulatory scrutiny. In comparison to multiple competitors, a single platform may increase consumer welfare if network effects are large or may decrease welfare due to higher prices or reduction in platform variety. We study the net effect of this trade-off in the context of the merger between the two largest platforms for pet-sitting services. We exploit variation in pre-merger market shares and a difference-in-differences approach to causally estimate network effects at the platform and market level. We find that consumers are, on average, not substantially better off with a single combined platform than with two separate and competing platforms. On one hand, users of the acquiring platform benefited from the merger because of network effects. On the other hand, users of the acquired platform experienced worse outcomes. Our results highlight the importance of platform differentiation even when platforms enjoy network effects.

JEL-codes: D22 D43 L12 L41 L81 M21 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-com, nep-ind and nep-pay
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