When Does a Platform Create Value by Limiting Choice?
Journal of Economics & Management Strategy 23, no. 2 (2014): 258–292
57 Pages Posted: 20 Oct 2010 Last revised: 4 Jul 2019
There are 2 versions of this paper
When Does a Platform Create Value by Limiting Choice?
Date Written: September 15, 2010
Abstract
We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (users have an incentive to consume more applications than the social optimum to better satisfy their preference for variety); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the socially efficient allocation), destroy Pareto- dominated equilibria, and reduce the severity of the coordination problem faced by users.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Two-Sided Platforms: Pricing and Social Efficiency
By Andrei Hagiu
-
A Price Theory of Multi-Sided Platforms
By E. Glen Weyl
-
Empirics of Antitrust in Two-Sided Markets
By Marc Rysman
-
Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel
-
Indirect Network Effects and Adoption Externalities
By Jeffrey Church, Neil Gandal, ...
-
Indirect Network Effects and Adoption Externalities
By Jeffrey Church, Neil Gandal, ...
-
Merchant or Two-Sided Platform?
By Andrei Hagiu