Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization

Yifan Dou, D. J. WuInformation Systems数字化转型UTD24

Information Systems Research2021-08-02Fudan University; Georgia Institute of TechnologyDOI

Citations106

A repeated challenge in launching a two-sided market platform is how to ignite the cross-side network effects to jump-start adoption. This research note studies “piggybacking”—expanding the focal market to recruit exclusive users from external networks—as a new and nonpricing control to launch platforms in conjunction with pricing controls. We first consider consumer-side piggybacking. Our results provide a rich set of novel insights into strategies that platforms use to monetize exclusive access to external users with nontrivial characterizations of the interplay among piggybacking, cross-side network effects, and price competition. We identify conditions when piggybacking is profit improving and when it leads to a prisoner’s dilemma, depending on the piggybacking cost and strengths of cross-side network effects. Among others, we show that piggybacking may intensify rather than ease price competition. We then consider provider-side piggybacking, and we show that the insights are qualitatively the same as consumer-side piggybacking except that the prisoner’s dilemma disappears if piggybacking providers multihome.

DilemmaComputer scienceBusinessIndustrial organizationMicroeconomicsEconomicsDigital Platforms and EconomicsICT Impact and PoliciesInnovation Diffusion and Forecasting