Competing by restricting choice
Subtitle: the case of search platforms
By: Hanna Halaburda, Mikolaj Jan Piskorski
Contributors: Piskorski, Mikołaj Jan; Harvard Business School
Edition: 3rd rev.
Series: Working paper / Harvard Business School -- 10-098; Working paper (Harvard Business School) -- 10-098
Publisher: Harvard Business School
Published: 2011
Place of publication: Boston]
Language: eng
Number of pages: 39
Description: 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-off 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.
Notes: "05/10, revised 06/10, 03/11, 08/11" -- Publisher's website.

"September 6, 2011" -- added t.p.

Previously published as: Platforms and limits to network effects.

Includes bibliographical references.