Monday, October 24, 2011

Competing by Restricting Choice: The Case of Search Platforms

Posted by D. Daniel Sokol

Hanna Halaburda, Harvard Business School and Mikolaj Jan Piskorski, Harvard University - Competition & Strategy Unit address Competing by Restricting Choice: The Case of Search Platforms.

ABSTRACT: 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.

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