What a merger between two pet-sitting platforms can tell us about network effects
Platform Papers is a monthly blog about platform competition and Big Tech. Blogposts are written by prominent scholars based on their research. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.
This blog is written by Chiara Farronato
How many times have you heard managers, regulators, and academics talk about network effects in digital platforms? Network effects arise when the value a participant derives from joining a platform is an increasing function of the number of other participants on the same platform. Network effects are as old as your grandparents’ home telephone. Back then, there was no use in a phone if none of the people you wanted to talk to also had it. And the more friends and family had a phone, the more you benefited from buying one to communicate with them.
Fast forward almost 150 years, and many of the most valuable companies today benefit from network effects. Meta, Facebook’s parent company, is currently valued at USD 780 billion thanks to its ability to attract almost 3 billion active monthly users, which in turn make the platform attractive to millions of advertisers. The same is true for Amazon Marketplace, where millions of sellers and hundreds of millions of buyers exchange products globally.
When network effects are strong, having market participants join a single dominant platform rather than spreading across many competing platforms maximizes value creation. This implication was not lost on Theodore Vail, the fourth president of the Bell Telephone Company, who in the early 1900’s, used network effects to argue that Bell Telephone should have a monopoly on telephone networks. Since then however, network effects have been used to justify launch strategies and acquisition decisions across a variety of industries, not all of which in reality exhibit strong network effects.
How can we quantify the strength of network effects? The truth is: it’s hard. In theory, one would want to measure participants’ utility and how it varies as the number of platform participants changes. However, changes in the number of platform participants are often correlated with other events that may affect participants’ value from a platform. Think about Amazon Prime Day, when many deals are available to Prime members. On those days, you’re likely going to see a sizable increase both in the number of sellers listing products and people shopping on Amazon. But the increase in transaction volume—a clear sign that buyers and sellers benefit from Amazon—is due to the presence of deals and discounts rather than network effects.
Dog eat dog: The merger of Rover and DogVacay
In a Management Science paper that I wrote in collaboration with Jessica Fong and Andrey Fradkin, we found an ideal setting where a platform experienced a sudden increase in the number of its participants. Rover, the largest pet sitting platform in the US, acquired DogVacay, its largest competitor, in the Spring of 2017. By the summer of the same year, Rover had shut down DogVacay, and asked pet owners and sitters to migrate to rover.com.
Because pet owners typically look for pet sitters close to their home, the geographic variation in the size of the two competing platforms implies that Rover experienced larger increases in the number of platform participants in some cities—those where DogVacay was large—compared to others. Thus, if network effects were real, we would expect greater benefits in cities where Rover experienced a larger influx of participants from DogVacay. This is indeed true in our context, where we find clear evidence of network effects. But our results do not end there.
As much as pet owners and sitters benefit from being able to find a trading partner with whom to transact, and the likelihood of that match increases when there are more pets and sitters to choose from, there’s a reason why not all pet owners and sitters hadn’t already converged to a single dominant platform. Academics call that reason “horizontal preferences.” The fact that some consumers may prefer red shoes while others may opt for blue shoes is an example of horizontal preferences. If people have horizontal preferences over Rover and DogVacay (perhaps because of their web design, or brand reputation), eliminating DogVacay may hurt pet owners and sitters for whom DogVacay was their favorite alternative. And if this effect were too large, it could end up offsetting the network benefits of the merger.
If horizontal preferences were strong, we would expect that pets and sitters from DogVacay would have a harder time finding matches on Rover, and would leave as a result. Our analyses strongly support this hypothesis. But, why would DogVacay users prefer DogVacay? After all, both platforms were designed to match pets with sitters, with similar pricing, search algorithms, payment systems, and review mechanisms.
We find evidence for repeat exchanges and switching costs to play an important role in explaining why DogVacay users left after the merger with Rover. Owners often prefer their pets to stay with the same sitter over time. The migration to a new platform likely made finding the same sitter harder, especially if the sitter left altogether rather than migrating to Rover. Owners may also find their previous sitters offline, making disintermediation an additional driver of attrition. Surprisingly, new users had similar experiences, suggesting that horizontal preferences do not simply originate from experience gained while using a particular platform.
Managerial and policy implications
Overall, we show that platform differentiation is in practice an important factor in offsetting network effects. Our results imply that a single dominant platform may not be as effective as multiple platforms, both from a strategic and antitrust perspective. The antitrust perspective is more obvious. Regulators are interested in ensuring that consumers have multiple options to choose from, because that creates healthy price competition and incentives for companies to keep innovating. Even though antitrust authorities have historically been hesitant to get involved in regulating digital platforms, the tide has already changed in Europe with the passing of the Digital Markets Act, and may soon be changing in other countries. After all, even the Bell telephone monopoly system was eventually dismantled.
The strategic perspective is more subtle. Network effects are often assumed to be large enough to warrant mergers and acquisitions strategies that progressively concentrate activity on a single dominant digital platform. However, the simple presence of network effects is not sufficient to justify these strategies. Instead, it may be beneficial for a company to operate multiple platforms rather than combining them. In fact, there are many instances of acquisitions where the acquired platforms remained operative—e.g., Zillow and Trulia, or the many online travel sites within the Booking Holdings group.
Beyond mergers, our study calls into question the importance of a first-mover advantage and the likelihood of a winner-take-all equilibrium, which have historically pushed platforms to invest heavily to achieve scale fast and deter competitive entry. In fact, despite network effects, entry and competition are likely in equilibrium, where multiple platforms can coexist and new platforms can successfully enter by identifying niche consumer preferences. This may be why in the ride-sharing market, Uber and Lyft are still competing, and why Alto may end up becoming a thriving alternative for the luxury segment.
In this evolving narrative of network effects, the true strength lies not solely in the number of participants, but in the variety of choices. The finale of this story is yet unwritten, but it’s clear that a balance of platform size and platform variety will guide the next act in the ever-changing digital landscape.
Farronato, C., Fong, J., & Fradkin, A. (2023). Dog eat dog: Balancing network effects and differentiation in a digital platform merger. Management Science.
Platform Papers is edited and published by Joost Rietveld.
The Role of Superstar Exclusivity
Platform Papers is a monthly blog about platform competition and Big Tech. Blogposts are written by prominent scholars based on their research. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.
In the dynamic world of digital markets, platforms play a crucial role in facilitating interactions between various groups of agents with varying degree of market power. Some of these agents significantly influence consumer participation on a platform and can be considered superstars. Critical questions are: how does the presence of superstars shape competition between platforms, and what are the effects of platforms’ acquisitions of superstars?
The role of superstars
In many digital markets, platforms host a mix of professionals and “complementors”, where the former, especially superstar artists or developers, tend to be more attractive to consumers. For instance, music streaming platforms like Spotify and Apple Music feature established superstars such as Beyoncé and Taylor Swift, along with a long tail of emerging talents. Similar examples exist in mobile app markets, where popular applications like WhatsApp and Instagram coexist with independent ones and in the video-games market, where well-known gaming studios, such as Activision Blizzard and Ubisoft, among others, produce and distribute AAA+ games (e.g., Destiny, Battlefield, and the Call of Duty). The relevance of superstars on platforms extends to other domains such as open-source software, app-stores, news, and sports broadcasting.
The value of exclusivity
Superstars can provide a competitive edge to platforms, particularly when they offer exclusivity to one platform over other(s). For example, in the music industry, Taylor Swift released her album 1989 under time-limited exclusivity conditions on Apple Music before making it available to other streaming platforms. Similar deals have been signed by other major artists and podcasters, and the practice has also been adopted by Apple Music’s competitors, Tidal and Spotify. In the gaming industry, Sony has several AAA games exclusive on their PlayStation consoles (e.g., God of War, The Last of Us).
Exclusivity can enhance a platform’s market reach and allow consolidation of its competitive position because the presence of cross-group externalities can also spur within-group externalities. For instance, within-group externalities can be easily spurred by exclusivity in the video game industry due to multiplayer games, which results in the formation of communities. Indeed, many users would migrate to a platform hosting the superstar exclusively. Therefore, superstar exclusivity jump-starts a “network effects feedback loop” (see Figure 1) where more complementors also associate with the platform favored by the superstar, further attracting additional consumers. Thus, consumers and complementors tend to agglomerate on the platform favored by the superstar, resulting in direct and indirect gains and market capture for the favored platform.
From the perspective of a superstar, the exclusivity choice involves a complex trade-off. Specifically, on the one hand, by offering its product exclusively, the superstar can benefit from a more lucrative fee charged to the favored platform. On the other hand, exclusivity implies a lower consumer reach (i.e., only those consumers who patronize the favored platform) resulting in lower engagement and ancillary revenues. For instance, ancillary revenues can take the form of royalties from streaming, tickets and merchandize sales, and in-app purchases. This complex trade-off determines whether a Superstar decides to be exclusive on a platform or non-exclusive.
In our study titled “Superstar exclusivity in two-sided markets”, forthcoming in Management Science, we develop an economic model to analyze exclusivity decisions made by superstars and their effects on competition between platforms. In addition, we investigate how exclusivity decisions change after a superstar has merged with a platform.
Given that exclusivity requires the superstar to limit its consumer reach, the exclusive fee charged to the favored platform must compensate for the foregone revenues achievable under non-exclusivity. We show that a superstar finds it profitable to be exclusive on a platform only if it can substantially enhance consumer participation. This jump-starts the network effect feedback loop attracting more complementors and, thus, more consumers. As a result, the superstar’s ability to charge for exclusivity increases while minimizing losses from limited market reach (e.g., foregone ancillary revenues). In contrast, if the superstar cannot attract a substantial base of consumers by signing an exclusive contract, non-exclusivity is more profitable because it allows for a wider market reach and higher ancillary revenues. We find that exclusivity can lead to welfare gains when platform market participants find it highly valuable to interact with each other, i.e. when network effects are strong.
The above discussion has important real-world implications.
In markets where consumers are not very “mobile” due to lock-in effects, a superstar has a lower ability to attract significant masses of consumers and thus jump-start the network effects feedback loop. This makes it unprofitable for the superstar to offer exclusive deals in the first place. For example, these lock-in effects exist in markets where consumers must pay upfront the cost to participate on a platform such as buying expensive electronic devices (e.g., smartphones or gaming consoles). In such markets, the likelihood of exclusive deals is expected to be lower since a new exclusive content would not trigger immediate consumer switching. Note, however, that one may still observe exclusivity in such markets. Often such exclusives are the platforms’ first party apps (e.g., Apple’s suite of apps).
In contrast, in markets where consumers are very “mobile” and have low entry and switching costs, one would expect a higher likelihood of exclusive deals by superstars. For instance, it is quite common for superstars to offer exclusivity in the music and video streaming markets, where subscription fees are low and cancellation is easy. For instance, Spotify, the largest music streaming service by volume, allows cancellation of subscription anytime.
Does superstar acquisition by platforms enhance the likelihood of exclusivity?
In recent times, the acquisition of a superstar by a platform has been a topic of intense discussion and concern in policy circles. A notable example is Microsoft’s proposed acquisition of Activision Blizzard, which many competition authorities initially challenged and cleared afterwards. One primary concern was that Microsoft would shut-down access to Activision Blizzard’s games for competing consoles, in particular Call of Duty.
When a platform acquires a superstar, the new merged entity (platform-superstar) decides whether to withhold access or license the superstar content with rivals. If the superstar content is licensed to the rival, the merged entity benefits from the largest market reach of the superstar content, making the platform market less competitive. Indeed, the two platforms offer the same value to consumer and there are no incentives for consumers to switch and jump start the network effects feedback loop. If, instead, the superstar content is withheld, the merged entity becomes more aggressive in the market, and this intense competition reduces the rival’s profit. Against this backdrop, the merged entity can negotiate better terms and conditions for licensing the superstar content to the rival platform. As a result, the merged entity may have fewer incentives than before the acquisition to engage in exclusivity (i.e., withholding the superstar content).
Implications for managers
There are several implications for strategies that platform owners, managers of superstars and complementors can take into account when deciding which platform to affiliate with. First and foremost, in markets with cross-group externalities, exclusivity is the most profitable choice in platform environments with sufficiently intense inter-platform competition. One way to measure the competition’s fierceness is to assess consumer preferences and their incentives and abilities to switch from one platform to another. Securing a large number of switchers is key to ensuring the profitability of such a strategy.
Second, the decision of superstars to go exclusive to one platform should be monitored closely by small complementors, who can, in turn, appropriate some of the benefits generated by the platform’s decision. Our analysis suggests that those complementors with high costs to adapt their products to the platform’s specificities can benefit the most from following the superstar and going exclusive as well. Superstar presence can help complementors break into the market and increase variety and differentiation.
Understanding the dynamics of superstar exclusivity in platform competition is crucial for navigating the ever-evolving digital market landscape. To drive effective strategies and ensure balanced antitrust policies, managers and policymakers should carefully consider the power of exclusivity, the trade-offs involved, and the implications for various market participants.
Carroni, E., Madio, L., & Shekhar, S. (2023). Superstar exclusivity in two-sided markets. Management Science.
Several interesting papers have been added to the Platform Papers references dashboard in the last month. Here are some highlights:
A study on eBay’s Top-Rated Seller badges offers a nice illustration of how a platform’s selective promotion of certain sellers can spill over to the rest of the platform. In the journal of Quantitative Marketing and Economics, Xiang Hui and colleagues find that when eBay offered financial incentives to sellers with the Top-Rated Seller badge for offering fast handling and generous return policies on their listings, other, non-incentivized, sellers also were more likely to adopt the promoted behavior. This suggests that a platform’s targeted actions can have wider, ecosystem-level implications.
Buyers often rely on a platform’s search algorithm to reduce search costs and help them make decisions. In the International Journal of Industrial Organization, Yangguang Huang and Yu Xie study the implications of such search algorithms not being fully equal—as they often are. “If a platform adopts a highly unequal search algorithm, buyers are likely to obtain repetitive information about a small group of sellers, which causes buyers to consider fewer options and suppresses competition.” Analyzing data from food delivery platforms, the authors provide evidence that markets with less equal distributions of search results have higher average prices and more concentrated sales. They point to the design of platforms’ search algorithms as a potent avenue for antitrust regulation.
Notwithstanding the increased risk of disintermediation, allowing buyers and sellers to communicate with each other can increase the chances of a successful transaction on a platform. In the context of a peer-to-peer platform for long-term real estate rental properties, Xia Zhao and colleagues, in Information Systems Research, find that direct communication between the renter and the host can lead to the renter choosing a relatively more distinct property compared to the average property under consideration. Moreover, renters tend to be happier with their choice following their exchanges with renters, suggesting they make more informed choices.
In Management Science, Alan Kwan and co-authors study the dynamics of crowd-judging on two-sided platforms. Crowd-judging is a novel crowdsourcing mechanism whereby buyers and sellers volunteer as jurors to decide disputes arising from transacting on the platform. Studying data from Chinese e-commerce platform Taobao, the authors find that jurors tend to suffer from in-group bias: buyer jurors favor the buyer in disputes and vice versa. The extent of bias reduces with juror-level experience and when the platform dynamically allocates disputes to a diverse pool of jurors.
Enjoy the rest of your summer and see you next month!
Platform Papers is curated and maintained by Joost Rietveld.
“The crowd” can be a valuable resource for platforms
The internet is, and always has been, shaped by content produced by “the crowd”, that is, individual contributors providing input freely. For instance, Wikipedia has rendered traditional encyclopedias obsolete by drawing on the huge variety of knowledge provided by (more or less) regular users who spend their time writing articles, seemingly out of the kindness of their hearts. And the content they provide is of high quality: As early as the year 2000, a crowd of “clickworkers” helped NASA classify images from Mars to determine the planet’s age – they did as good a job as trained scientists. Since then, platforms have tapped into this resource in many ways: Firms like Starbucks and Doritos have launched high-profile crowdsourced promotional campaigns, Lego and Threadless let users design new products, and Uber or Airbnb – as well as virtually all e-commerce platforms – rely on user-written reviews to establish trust between service providers and consumers. Clearly, the idea of involving the crowd in a platform’s value creation activities is intriguing, as it can constitute a source of content that is both of high quality and variety. In addition, users typically volunteer their time and effort for free, making it a low-cost resource as well.
Leveraging “the crowd” for competitive advantage is challenging
Research has looked into what drives these volunteers to become active in the first place, and it has identified a wide range of non-pecuniary sources of motivation. For example, some contribute to open-source software development because they see the need for a particular solution which is not provided by firms or because they want to hone their skills. Others become active for the social benefits it provides: They enjoy working with other like-minded volunteers and attaining a position of high social status within their online community. While these motivational sources can substitute for financial incentives – platforms do not have to pay their contributors – they also make it challenging to both attract and manage the crowd. First, crowdsourced platforms are usually subject to strong network effects – the larger the community, the stronger the social benefits. This generates “winner-takes-all” dynamics and platforms will have to fiercely compete for participation. And second, because volunteers participate for their own enjoyment, it is challenging to direct them towards activities the platform owner has in mind. Put simply, they alone choose if, when, and to what extent to contribute, not beholden to the interests of the platform that hosts them. Hence, while the crowd has the potential to be a valuable resource, it is highly uncertain that platforms are able to actually leverage it for competitive advantage.
An open question: How are platform competition and contributor activity interrelated?
Which, then, are conditions that can lead to the crowd actually being a source of competitive advantage for platforms? This is the broad question we seek to answer in our article “Online communities on competing platforms: Evidence from game wikis” published in the Strategic Management Journal. We study two competing platforms, Fandom and Gamepedia, that host several crowdsourced game wikis. Similar to Wikipedia, community members write and maintain articles about different games that can be read by the public. However, instead of being one single repository of knowledge, wikis in our setting are distinct entities that cover a single game and that are maintained by distinct online communities. In addition, both platforms have a strong interest in hosting large, well-maintained wikis to attract an audience which they monetize via advertising. A key feature of our study is that their ability to attract such communities varies substantially across different games. That is, Gamepedia has an advantage in the coverage of some games, and Fandom in the coverage of others. To answer our research question, we investigate how the activity and contributions patterns of these online communities differ between more and less successful domains (as represented by games coverage).
Activity and contributions patterns between more and less successful crowdsourced platforms
In our study, we identify four conditions under which the crowd can provide a platform with a competitive advantage:
Success breeds success: Not unlike other types of platforms – such as e-commerce or social media – having a strong competitive position today will help in attracting and motivating subsequent volunteer activity. There are two reasons for this: First, new contributors are more likely to join a more active and well-maintained community. And second, a better competitive position comes with greater non-pecuniary benefits for contributors – they reach a larger audience with their content, and they can collaborate with a greater community.
“Personpower” matters most: Community size is the single biggest factor that determines a platforms’ competitive advantage. Having more community members contributing means more content on the platform – it is as simple as that. Further, it outweighs any advantages arising from network effects or non-pecuniary benefits which can drive individual contributors’ activity.
Social benefits also matter: Each individual volunteer contributes more in a larger wiki community. This can be attributed to social benefits, that is, they enjoy collaborating with like-minded peers. Hence, crowdsourced platforms are subject to direct network effects arising from these non-pecuniary sources of motivation.
Contributor heterogeneity matters: Not all community members are equally active. In fact, most content is produced by a fairly small group of high-productivity contributors in each community, and failing to attract (or retain) them will jeopardize a platform’s competitive standing. In addition, this very important group of core contributors does not seem to care much about the community aspect of crowdsourcing. Instead, they are driven by the satisfaction and sense of accomplishment that comes from contributing to the “winning” platform. Moreover, not only are high-productivity contributors the greatest content producers, but they also engage in policing and maintenance activities to ensure the high quality of their wiki.
What can owners of crowdsourced platforms do to attain a competitive advantage?
These four conditions have implications for potential strategies that platform owners can pursue to attain an advantage. First, community size and the presence of high-productivity contributors are the most important factors. However, neither are easily attained or imitated. Instead, acquiring a competing platform may be a more promising avenue. As a case in point, Fandom acquired Gamepedia in early 2019 following years of coexistence and competition in the area of video game wikis. In addition, Microsoft acquired GitHub, the most popular platform for open-source software development, in an effort to tap into crowdsourcing. Second, because size in itself is more important than individual contributors’ non-pecuniary benefits, strategies aimed at growing the community fast are more important than those aimed at motivating its members. Consistent with this, interviews with wiki community members revealed a focus on search engine optimization to increase website traffic and, in turn, community growth. And finally, the reliance on high-productivity contributors is a double-edged sword. They are an important determinant of competitive advantage on the one hand. But on the other hand, interviews with community members confirmed that they do not respond well to heavy-handed attempts at directing their activities, which makes managing them challenging. Instead, platform owners have to trust their judgment and consider involving them in some decisions that affect their community.
This blog is based on Johannes and Tobias’ research published in the Strategic Management Journal, which is included in the Platform Papers references dashboard:
Loh, J., & Kretschmer, T. (2023). Online communities on competing platforms: evidence from game wikis. Strategic Management Journal, 44(2), 441-476.
In this month’s Platform Papers update, some platforms for good, some platforms for bad… All outstanding scholarly contributions though:
With all the regulatory scrutiny big platforms are facing these days, we can easily lose track of the societal benefits that platforms bring. In a recent paper published in the Journal of Product and Innovation Management (JPIM), Paavo Ritala outlines how platforms can help to address ‘Grand Challenges’ by way of their coordination structures, instigation and maintenance of collective action, and generativity potential. Clearly, platforms can be a force for good!
Transitioning to the ‘bad’ then, in Management Science, Liu, Lou, and Li study the unintended consequences of advances in matching technologies. The authors argue that platforms may have an incentive to obfuscate high quality matches between buyers and sellers on their platform. High-level match quality can reveal information about the thickness of the market. If demand is thin, platform suppliers might decide to leave the platform resulting in a loss of revenue.
Continuing on this theme, Long and Liu argue in a paper published in Marketing Science that “a platform may manipulate an inferior seller’s product to appear more attractive to intensify sellers’ competition to bid for advertising and also manipulate a superior seller’s organic placement to either compensate or penalize the superior seller.” Put differently, it’s not only buyers and sellers that can at times be considered as bad actors, but also the platform itself… Yikes!
Finally, in The Journal of Industrial Economics, José Ignacio Heresi looks at platform price parity clauses (e.g., contractual clauses that stipulate platform suppliers to not offer lower prices or better terms on other platforms or their own (digital) storefronts than on a focal platform. Such clauses have been observed on Booking.com and Valve’s Steam platform). The main takeaway from the study is that such clauses aren’t great for consumers: “when price parity clauses are endogenous, they are only observed in equilibrium if they hurt consumers.”
These and several other papers were added to the Platform Papers references dashboard in the last month.
Platform Papers is curated and maintained by Joost Rietveld.
Management without managers?
Platform Papers is a monthly blog about platform competition and Big Tech. Blogposts are written by prominent scholars based on their research. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.
In 2009, a new organizational form, which we call the decentralized platform, began to diffuse without relying on managerial authority and without having to employ anyone. The most well-known decentralized platform, Bitcoin, has millions of users, thousands of contributors, and a market valuation never achieved in history by an organization without a CEO nor shareholders.
Based on this novel blueprint, Web3 has quickly emerged as a new way of interacting with the Internet. Unlike Web 2, where coordination between digital platform participants is orchestrated centrally by a corporation, Web3 is rooted in the idea that users should own and exchange their data without relying on corporate intermediaries. To achieve direct coordination, Web3 requires decentralized platform infrastructures that can facilitate exchange activities without the intermediation of centralized platforms (e.g., Gmail, Uber.com, Instagram).
How do decentralized platforms operate?
Decentralized platforms provide an alternative to corporate platforms for coordinating the exchange of digital assets, but without the “visible hand” of corporate managers, how does such coordination happen exactly?
Our study “The future of the web? The coordination and early-stage growth of decentralized platforms” demonstrates, based on in-depth qualitative and quantitative analyses of twenty blockchain platforms, that Web3 platforms combine three components for operating in the absence of managers:
(1) Decentralized Algorithmic Coordination. In the absence of a manager, participants must rely on algorithms to coordinate tasks. Instead of residing in contracts drawn out by corporate managers, platform rules are encoded in blockchain algorithms that define how participants interact and share data representing value. As long as one has trust in the algorithms, then potentially, one need not have trust in any other individual or organizational collaborators. One can then transact without having to know the real-world identities of their counterparties.
Specifically, blockchain algorithms encode design rules and programs within a shared space and time, thereby regulating routine task performance (e.g., when to perform a specific task with required resources) and rewards distribution (paid out in cryptocurrency). Design rules include how information shared across the network is verified and validated, thus providing a consistent basis for trust in the algorithms.
(2) Decentralized Social Coordination. Despite the absence of managerial orchestration, social coordination among key contributors remains indispensable to ensure ongoing maintenance of the platform. On decentralized platforms, social coordination follows a similar structure to open-source software development (OSSD)—a common format for the developer community to coordinate their contributions to software upgrades. While in centralized platforms, proprietary development typically involves corporate employees only, decentralized platforms are developed by voluntary contributors who self-select into the project, much like Linux and Wikipedia contributors. In addition to development, decentralized platforms differ in that the verification and validation of routine tasks are performed by network validators (e.g., “miners”, “stakers”), rather than by middle managers. Social coordination ensures that sophisticated checks and balances are in place to account for the respective interests of developers and validators.
(3) Decentralized Goal Coordination. While traditionally, organizational goals are set by central authorities (e.g., the CEO), in the absence of managerial orchestration, decentralized platforms sometimes rely on nonprofit foundations to corral everyone’s efforts. Despite having no formal authority, for instance, the Ethereum Foundation can offer a coherent vision of how various classes of platform participants might fit together to achieve long-term goals. Based on its vision, a foundation can then offer knowledge and resources (e.g., developer toolkits and grants) to platform contributors who buy into this imagined future and are willing to help build it.
Coordination Configurations: A Balancing Act
The three mechanisms depicted above do not work in isolation, nor can they be added arbitrarily to the design of decentralized platforms. Without a centralized authority to provide a stable structure, participants must negotiate decentralization by themselves, leading to a fragile equilibrium that ideally should deliver the kind of accountability, predictability, and common understanding necessary for sustainable coordination. Finding the right balance is key to making headway to early-stage growth.
Our findings suggest that, to fuel early-stage platform growth, platform contributors should either empower a small group of core developers or create a foundation to provide a guiding vision. Intriguingly, we did not observe any decentralized platform that grew successfully by decentralizing all three components of coordination at the same time. We also did not find evidence that fully decentralized algorithmic coordination was sufficient to bootstrap a platform. That said, we did find that insufficiently decentralized algorithmic coordination could cause instability and lead to early-stage platform decline.
So, what do decentralized platforms mean for businesses and organization designers?
Fundamentally, blockchain is a coordination technology that requires group adoption. Organizations can only benefit from adopting decentralization technologies and decentralized platform business models if they understand the limits of decentralization. This understanding is particularly important for organization designers, as the adoption of a decentralization technology entails fine-tuning the degree of decentralization across different platform layers to optimize coordination.
As the first iterations of decentralized platforms, cryptocurrencies have grown beyond their initial use cases to help allocate tasks, resources, rewards, and information across a range of industry sectors. As a result, blockchain-based decentralized platforms provide infrastructure for bourgeoning Web3 applications such as DeFi, NFTs, and DAOs. Those DAOs (for “decentralized autonomous organizations”) increasingly populate the Web3 space, but already experience the limits of decentralization first-hand as centralizing forces spontaneously resurface amidst their disengaged token holders, who end up relinquishing control to a few insiders—those with the resources, competence, and time to participate in every aspect of decision-making.
Having diffused beyond cryptocurrencies, decentralized platforms will warrant closer attention from industry, academia, and regulators alike as they embody a new class of competitors in the digital economy.
Hsieh, Y. Y., & Vergne, J. P. (2023). The future of the web? The coordination and early‐stage growth of decentralized platforms. Strategic Management Journal, 44(3), 829-857.
It’s been a relatively slow month in terms of new platform papers being published, but there have been plenty of intersting developments in the ‘real world’:
Last week, the inaugural summit of the European Digital Platform Research Network (EU-DPRN) took place at Bocconi University in Milan. EU-DPRN aims at bringing together European scholars studying platforms from across different disciplines (e.g., strategy, marketing, information systems, economics, etc.). The first summit was a success; it featured a PhD workshop, ten paper presentations, six poster presentations, a keynote and two stimulating panels. Next year, the conference will be hosted by the UCL School of Management in London!
The competition law community is increasingly interested in so-called ecosystem theories of harm. When large platform companies increase their scope by acquiring a target in a complementary or unrelated market, this can both benefit the acquiring firm in novel ways as well as potentially disadvantage competitors. The question is, do we need new theories of harm to analyze such acquisitions? It’s not an easy question. Recently, two insightful CEPR columns (1 & 2) got published on the topic and earlier this week the British Institute of International and Comparative Law (BIICL) hosted a roundtable debate on the topic.
Platform Papers is curated and maintained by Joost Rietveld.
Inducing more reviews may not help the market and other thoughts on the difficulty of improving reputation systems
Reviews are everywhere on digital platforms, yet it is common knowledge that review systems are flawed. Not all users contribute reviews and those who do may have unusual experiences or preferences. In the course of writing a review, the lack of an objective standard for mapping experiences to ratings leads to inconsistencies amongst reviewers. Reviewers may also leave out relevant details to appear amicable or may exaggerate negative experiences as a form of retaliation. Despite these issues being widely recognized and discussed in the media, it seems review systems have barely improved over the past two decades. In this blog post, I will delve into the challenges of measuring reputation system improvements by examining a recent paper by David Holtz and myself.
Before discussing our results, it’s useful to consider the purpose of review systems. Review systems were introduced in the earliest digital marketplaces such as eBay to solve the problem of transacting with anonymous strangers on the internet, who could misrepresent their product or fail to deliver it altogether. Reputation systems incentivized sellers to act honestly while providing buyers with the information needed to avoid potentially low-quality sellers. This created a virtuous cycle where more buyers began to trust eBay, while sellers joined eBay for access to a larger market.
While the success of eBay’s reputation system demonstrates the utility of reputation systems for most marketplaces, it doesn’t provide a blueprint for designing the best system. Platform designers must choose how to solicit reviews and how to display information from reviews. Startup platforms begin with a reputation system that is chosen by early employees based on intuition. As platforms grow, they have the opportunity to use data and experiments to improve these reputation systems. Yet the seemingly unchanging design of reputation systems suggests that this opportunity is not being seized as much as it should be.
One reason for the lack of large changes to reputation systems is the lack of clarity about what signals are indicative of a better reputation system. Data scientists and researchers are often tempted to focus on immediate outcomes that are easier to measure. For example, policies such as reminders, nudges, and incentives can be shown to improve the quantity of reviews. The effects of these policies on reviews are easy to evaluate because reviews come shortly after interventions, and it’s easy to map treatment assignment of potential reviewers to review behavior.
It is more difficult to measure how shifts in reviews translate to improved outcomes for the market. In a forthcoming paper in Marketing Science, David Holtz and I take an initial step in mapping review policy to market outcomes using a large-scale field experiment on Airbnb. The experiment was assigned at an Airbnb listing level for listings which did not yet have reviews. For treatment listings, buyers were offered a $25 coupon post-transaction to review. For the control listings, buyers were not offered any incentive to review after a transaction. The incentives increased review rates and induced more negative reviews (as measured through star ratings and text).
Our primary insight involves examining the impact of these reviews on the quantity and quality of matches for listings. To do so, we connect a listing’s initial treatment (whether a guest to the listing is offered a coupon to review) to its subsequent outcomes. Specifically, we track the listing outcomes for a year following the treatment assignment. This enables us to assess the effects of incentived reviews on the number of transactions and match quality indicators, such as subsequent reviews and complaints. We also provide a measure of match quality based on the subsequent experiences of guests who engaged in transactions with listings from the experiment. Note that this measurement exercise involves merging data up to two years of data after the experiment concluded.
We find that while the treatment induced more reviews, these reviews failed to improve listing outcomes both in terms of nights booked or in terms of match quality. In fact, we find that measures of match quality actually fell due to the treatment. Our key theory for the fall in match quality, which we support with additional analysis, is that the induced reviews were actually less correlated with quality than non-incentivized reviews. We find these results even though the induced reviews were more negative than non-incentivized reviews, which may naively suggest that they are more accurate.
Our results show that it is insufficient to only look at the quantity and valence of reviews in order to evaluate whether a reputation system design change improves market outcomes. Interestingly, this is our second failure to find benefits from a reputation system change on Airbnb. In a recently published paper, David Holtz, Elena Grewal, and I found that making the reputation system simultaneous reduced reciprocity and increased review rates. Yet, even with large samples, we failed to detect effects of this change on market outcomes.
Our findings, while specific to certain reputation system changes and the context of Airbnb, offer valuable insights into reputation system design more broadly. Had we solely focused on the effects of these changes on reviews, we might have erroneously concluded that these alterations significantly benefited the platform. Other platforms should also adopt this long-term analysis of transaction volume and match quality when experimenting with reputation system design.
Circling back to the motivation of this post, I propose that a lack of innovation in reputation systems is, at least in part, due to the absence of a robust framework for evaluating changes in reputation system design. It is hard to advocate for resources in an organization when data scientists and product managers might struggle to assess the key performance indicators of a product change. It is also hard to advocate for longer-lived experiments and long-run analyses when product development cycles are often much shorter than a year.
What can data scientists and managers do to alleviate these constraints to improving and analyzing reputation systems? An obvious suggestion is to advocate for longer and more ambitious reputation system experiments. Additionally, it can be worthwhile to reserve time to re-analyze old experiments using a longer data horizon. Such re-analysis can yield surprising insights that will have implications for future design decisions. Statistical techniques such as surrogate analysis can also be used to learn about the longer-run effects of reputation system policies.
To summarize, by incorporating a comprehensive perspective that accounts for transaction volume and match quality, platforms can make better-informed decisions and design more effective reputation systems that genuinely benefit users and improve overall market outcomes.
Fradkin, A., & Holtz, D. (2023). Do incentives to review help the market? Evidence from a field experiment on Airbnb. Marketing Science.
Platform Paper Higlights
Let’s add a new feature to the blog (tell me how you like it, please). Here are some recently published papers on platform competition that stood out to me:
Sticking with the theme of reviews, a Journal of Consumer Research study by Rifkin, Kirk and Corus flips the perspective and ask what happens when it are consumers who are the ones being reviewed. The authors find that negative reviews of consumers (by sellers) on sharing economy platforms can harm the further diffusion of the platform. The negative effect can be attenuated by making reviews private (vs. public) and providing opportunities for justice restoration (e.g., response, revenge, dispute).
Andrey Fradkin is having a productive time! Another one of his papers together with co-authors Farranato and Fong recently got published in Management Science. The timely paper looks at the impact of horizontal mergers in the presence of network effects. They specifically study the merger of two US pet-sitting platforms, Rover and Dog Vaycay. When consumers have heterogeneous preferences for such services, the authors find, an increase in network effects following a merger can actually be offset by a loss in differentiation.
While platforms can have many benefits to both suppliers and buyers, one thing they often lack is a place of belonging or the feeling of being part of a team. A paper by Ai and co-authors published in Management Science studies what happens when drivers on a ride-sharing platform are randomly allocated into (virtual) teams. Compared with drivers in the control condition, treated drivers work longer hours and earn 12% higher revenue during the experiment. The effect, however, waned two weeks after the experiment.
In another study on ride-hailing platforms published in Management Science, Chung, Zhou and Ethiraj study the cross-platform competition effects from a platform’s governance policies. Specifically, when Lyft restricted drivers in New York City access to its platform due to tightned local regulations, Uber, too, saw its trip numbers reduced. The negative externality was also measured at times when access to Lyft was unrestricted. You could say that rising tides lift all boats, especially when their drivers can multihome!
These and 11 other papers were added to the Platform Papers references dashboard in the last month.
See you next month!
 Another concern in early marketplaces was that buyers would not pay, creating a role for seller reviews of buyers.
 Data and experimentation is often applied in soliciting reviews via notifications and emails and in using review information as a signal in ranking algorithms.
 Numerous studies have documented that these interventions do increase review rates and change the types of reviews which are submitted. These induced reviews are typically found to be more representative.
 There is also a separate literature that studies whether and how platforms tilt their reputation systems to promote transactions at the expense of match quality.
Does corralling a dominant platform help complementors?
Digital markets are increasingly dominated by a small number of technology platforms, prompting fears that platform owners may abuse that market power. Of particular concern is the threat that dominant platforms pose to complementor firms that depend on the platform for access to customers. For example, Google has been fined by the EU for privileging its own review and shopping comparison results over competitors on its search engine. Similar concerns have been expressed regarding Amazon promoting its own products over third party sellers in its online retail business or Apple leveraging excessive fees on developers through its App Store.
Traditionally, antitrust regulators focused on preventing firms from achieving a dominant market share in the first place, outlawing actions aimed at monopolizing markets and blocking mergers and acquisitions between firms with already high market share. But outright preventing platforms from growing to dominate their markets may be difficult, since platform markets are characterized by powerful network effects that create significant returns to scale and often yield winner-take-all outcomes. Breaking up platforms that become “too big” therefore may not be viable nor even beneficial to consumers.
Perhaps, then, it is more feasible to restrict a platform’s ability to exploit the market power that comes with massive scale. Regulators around the world are attempting to do so via newly introduced antitrust legislation, such as the Digital Markets Act in the European Union and the American Innovation and Choice Online Act in the United States. In a break from typical antitrust tactics, these new regulations do not seek to stop platforms from accumulating dominant market shares; instead, they enact rules that are meant to prevent large platforms from using that dominance to block fair competition and, in turn, innovation. But will constraining the behavior of an already-dominant platform actually restore competition and spur innovation in platform ecosystems?
In a recent paper, we attempt to shed light on that question by examining how a landmark antitrust intervention against a dominant tech platform impacted complementor firms. Specifically, we analyzed United States v. Microsoft, the first major antitrust case against a digital platform in the US.
The allegations against Microsoft were starkly reminiscent of what firms like Google, Apple, and Amazon stand accused of today: Microsoft purportedly used its dominance in operating systems (i.e. platforms) to block application developers’ (i.e. complementors’) visibility and access to customers, limiting innovation and customer choice. In 2001, the U.S. Department of Justice and Microsoft resolved the case via settlement, in which Microsoft agreed to stop engaging in activities that had been deemed anti-competitive, such as blocking customers from uninstalling its own complementor applications or punishing OEMs that tried to promote third-party complementor products.
While popular attention focused on “the browser wars” between Microsoft and Netscape, the allegations against Microsoft extended broadly across both consumer and enterprise software. We specifically examine the effects of the settlement in the enterprise infrastructure software industry. Infrastructure software consists of back-end applications that allow organizations to manage and maintain complex IT systems. The industry is divided into five complementor product markets – application development, application integration, database tools, network and system management, and security – which run on central platforms known as server operating systems. At the time of the intervention, Microsoft owned the dominant platform in the industry (Windows Server) and competed in all five complementor markets. However, Microsoft only achieved significant market share in two complementor markets: database tools and application development.
From a research design perspective, this variation in Microsoft’s complementor market share allows us to distinguish between markets that are likely to be sensitive to the intervention from markets that are not. In the “treated” complementor markets where Microsoft held significant share, the intervention suddenly constrained a powerful competitor, opening up strategic possibilities that may not have seemed viable before. In contrast, in the “control” markets where Microsoft held only minimal share, the intervention would not significantly change the competitive environment. Examining post-intervention differences between complementors in the treated versus control markets can thus yield insight into the impact of the intervention.
What we find is that the Microsoft antitrust intervention was a mixed bag for complementors: innovation went up, but profits went down. On the positive side, complementor innovation (measured as patents or R&D expenditures) increased in treated markets, particularly among those with the lowest market share. So, the intervention did in fact spur innovation among the complementors that would have been most vulnerable to Microsoft’s dominance. However, profitability dropped in treated markets – again, particularly among the complementors with low market shares. High market share complementors (who arguably did not require the same protection from regulators) did not significantly increase innovation nor did they suffer a profit penalty. Thus, while the intervention successfully prompted technical innovation, the firms that innovated did not actually benefit financially.
Why couldn’t complementors translate innovation into profits? Our interviews with industry experts indicate that complementors may have been more reliant on Microsoft than they had realized. Platforms like Microsoft often provide essential assets such as development tools to complementors in order to foster innovation on the platform. After being restrained by antitrust intervention, a dominant platform may not be as willing or able to freely share those assets, forcing complementors to incur the costs of developing replacements themselves. Indeed, several such assets were withdrawn by Microsoft after the settlement. Complementors – especially low-share complementors – were thus able to innovate but lacked the assets to bring those innovations to market in a profitable way.
Complementors and platform owners should therefore be mindful of complementor dependence on platforms. Complementors should not assume that antitrust action against platforms will be solely beneficial to them and should instead seek to develop resources and capabilities that allow them to profitably capitalize on innovation opportunities that might emerge. Platforms, meanwhile, should not encourage excessive dependence among complementors, as the long-term viability of a platform ecosystem depends on a fostering a variety of high-quality complements – a task that requires a healthy population of complementors innovating on the platform.
For regulators, our findings do offer some encouraging evidence that conduct remedies (i.e. interventions that restrict the behavior of dominant firms) can be effective in sparking technical innovation in platform ecosystems. But, innovation without profit is unlikely to foster healthy competition in the long term, particularly if profit penalties are disproportionately suffered by smaller, more vulnerable firms. Antitrust intervention that places shackles on dominant platform is therefore not an automatic cure for competition concerns. Instead, taking targeted steps to reduce complementor dependence on platforms for essential assets (or ensure those assets remain available after intervention) could be a potential win-win for both platforms and regulators: it could reassure regulators wary of abuse of platform market power while also benefitting the platform by invigorating profitable innovation across its ecosystem.
Thatchenkery, S., & Katila, R. (2023). Innovation and profitability following antitrust intervention against a dominant platform: The wild, wild west? Strategic Management Journal, 44(4), 943-976.
Platforms can promote early adoption by shaping market expectations
This blog is written by Kevin Boudreau.
Online platforms have become an integral part of society and are used for a wide range of activities. To continue expanding and innovating in this area, successful launches of new platform ventures are crucial. However, most platform ventures fail to take off due to the chicken-and-egg problem – potential users are hesitant to adopt platforms that do not have a large installed base and network effects. This study empirically tested one way that theorists have long conjectured was a way to induce adoption: by marketing in a way that seeks to shape would-be adopters expectations of future platform success. The logic here is that if (at least some) consumers believe the platform will eventually take off, they will join, thereby catalyzing network effects. A field experiment was conducted to test the theory that the initial growth of a platform depends on the market’s subjective expectations of the size of the future installed base.
Chicken-and-Egg–and the Problem of Multiple Market Equilibria
(And, why is marketing a far more strategic challenge in platform industries?)
Before explaining the role of expectations, it is useful to precisely understand the nature of the chicken-and-egg problem that new platforms must overcome. Better understanding this question clarifies why the job of marketing and promoting a platform involves far more than just the traditional marketer’s job of creating awareness and extolling the benefits of a new offer.
Let’s use a simple example to explain this idea. Imagine a market with only two potential buyers, A and B, who are considering adopting a new platform. The idea extends to cases of larger markets, but let’s just consider two possible buyers to explain the crux of the idea.
For simplicity, consider the costs of adopting the platform is $1. This might include whatever purchase or access charges to get onto the platform, the hassle of learning how to use a new platform, and whatever other financial or non-financial costs.
If there are network effects, the benefits of adopting the platform depend on how many people also adopt it. For simplicity, let us suppose that if everyone adopts the platform, both A and B will enjoy benefits worth $2 (and the net benefit is $2, minus the cost of $1). If no one adopts the platform, there will be zero benefits (and the net benefit of adopting is zero, less the cost of $1). Thus, this simple set up illustrates a simple illustrate of payoffs from adopting a platform where value comes from network benefits (rather than “stand-alone” benefits, which do not depend on whether others join).
We can represent the possible outcomes in a table. The rows represent A’s decision (to adopt or not), and the columns represent B’s decision. The numbers in each cell represent the payoffs (or benefits) that A and B receive, respectively. This game payoff matrix shows that there are two possible stable outcomes, or equilibria in this market. In the “everybody adopts” equilibrium in the top right quadrant, both A and B adopt the platform; in the “nobody adopts” equilibrium in the bottom left quadrant, no-one adopts.
Therefore, the challenge for executives, marketers, and strategists in platform industries is that moving from non-adoption to adoption is more than just “marketing” in the traditional sense of building awareness and convincing individuals of the value of an offer. Here, successfully marketing and promoting adoption of the platform means coordinating market actors—as a group—out of the stable and self-reinforcing “nobody adopts” equilibrium to establish an altogether new equilibrium of “everybody adopts.” But, of course, no one wants to adopt the platform here and find out they are the only one.
While this abstract example is in a market of just two people, the same idea applies to real markets for platforms, with many more potential adopters or even multiple types of adopters, where some minimum critical mass must be coordinated onto a platform to successfully built a network and network value.
Coordinating the Market to Adopt – by Influencing Subjective Expectations
Coordinating a large number of adopters onto a new platform is typically extremely difficult and, in most cases, fails. One theorized strategy for promoting adoption that has been hypothesized by economists as a means of solving the chicken-and-egg adoption problem is to somehow influence consumers’ expectations that others will eventually adopt the platform.
Can this strategy work? How? The multiplicity of possible equilibria creates fundamental uncertainty about what others will do and which outcome will eventually emerge. Accordingly, adopters cannot “look forward and reason back” as in usual rational expectations, and expectations about future adoption are necessarily subjective. Therefore, conventional means of influencing rational expectations, such as economic signaling and pre-commitments, should not work as usual.
So, if expectations can be formed and influenced, how can this possibly work? If it simply isn’t possible for consumers to objectively form a rational expectations that the platform will eventually be widely adopted – can they at least form subjective expectations that a platform will be adopted? Moreover, is it even possible for executives and marketers of a platform to influence expectations themselves, given consumers should see platform executives and managers as biased storytellers about the future of their own platform?
A Field Experiment
It is exceedingly difficult to design research studies to systematically empirically study platforms. This is especially so in attempting to explicitly test how nuanced growth dynamics might be influenced by something unobservable as subjective expectations. The question of empirically testing expectations in platform industries was, in fact, an idea I had even back in graduate school at MIT, when I was thinking about the strategies I saw platform executives pursue. It took me some years to imagine a research design that would be appropriate for testing these questions, and more time to then implement the research in a live platform.
A research design was devised and implemented with the goal of investigating how statements issued from a platform about its own expectations of future size of its installed base of users affected the likelihood of individual’s adopting the platform. The experiment was conducted by randomly varying messages to 16,349 individuals identified as potential adopters of a newly launched product development platform focused on the Internet of Things (IoT). The experiment varied the content of the invitation, which included a statement regarding the number of users and companies that the platform expected would join. The invitation also included a statement about the current installed base, to disambiguate effects of statements regarding expectations from the true installed base. A central challenge of this research design was to create random variation in both statements of expected installed base and current installed base across individuals, while avoiding any deception whatsoever. (Details are explained within the paper.) The research was carried out as part of the first 60 business days following the launch.
The experiment found evidence consistent with adoption patterns being significantly affected by statements made by the platform, and overcoming the initial “chicken-and-egg” problem. Remarkably, the subjective statements regarding expectations of the future installed base had a larger influence on adoption rates than did disclosures of the true current installed base—at least this was true during early adoption. For example, statements of larger numbers of expected users caused more adoption than smaller numbers. Further, stating a small (current or expected) installed base of users led to lower demand than stating nothing at all. Statements of expectations had no effect on adoption once the installed base grew large.
Implications for Promotion, Marketing, and “Evangelism” of New Platform Ventures
The findings have important implications for the promotion, marketing, and “evangelism” of new platform ventures. The results suggest that the promotion of a new platform should focus on the potential size of the future installed base rather than the current size. Small current or expected installed bases of users should not be disclosed, as it can lead to lower demand than stating nothing at all. Instead, the focus should be on generating expectations of a large future installed base. This is particularly relevant for new platforms, which face the chicken-and-egg problem, as the expectations of the market can lead to a self-fulfilling prophecy.
The demonstration that adoption patterns can be significantly affected in a context of fundamental entrepreneurial uncertainty raises important questions. Better understanding of how and why platform entrepreneurs are able to persuade and influence market participants could bring fundamental advances to the ability to market and promote the growth of platforms. In the paper, I discuss alternative plausible explanations of why statements by the platform could have had an influence. The explanation that is most consistent with the facts is that (some) boundedly rational adopters respond to statements by the platform simply at face value, influenced by some plausible characterization or storyline of the future. In such an explanation, the adopters might even believe themselves to be prescient, as their expectations were self-fulfilling. (In this case, the eventual adoption of thousands and thousands of users in continents around the world turned out to be consistent with claimed expectations.)
If this explanation is true, adopters might not require a fully rational and credible basis for accepting statements and we might imagine some considerable role to be played by rhetoric, charisma, moral suasion, and other tools of influence. Certainly the world of platforms and tech have had persuasive storytellers and persuaders, including the likes of Steve Jobs. The last time I checked there were 2,330 “Chief Evangelists” listed on LinkedIn.
Boudreau, K. J. (2021). Promoting Platform Takeoff and Self-Fulfilling Expectations: Field Experimental Evidence. Management Science, 67(9), 5953-5967.
Strong platform control can encourage rather than depress complementors’ innovation activity
Digital platforms are drawing increasing attention from innovators and entrepreneurs, whether it is about creating a new platform, or providing product offerings and exchanging new ideas on an existing platform. Apple’s App Store, which hosts millions of mobile apps published by developers and used by billions of users, is a great example of a platform that harnesses the power of distributed innovation agency. Indeed, platforms like the App Store are now being seen as a “semi-regulated” marketplace or unique organization that foster innovation and entrepreneurship under the leadership of the platform owner (Apple). Yet, such leadership is surely easier said than done. After all, platform owners (Apple) do not own the product offerings (apps), nor do they have direct control over their business partners—complementors (app developers).
So what can a platform owner do then to coordinate and orchestrate the value creation activities of autonomous complementors (often in thousands or millions) that are critical to the vibrancy and success of a platform?
This question was the focus of a research paper we recently published in Strategic Management Journal. We invoke the idea of “platform governance”, or the “set of rules and policies that platform owners adopt in order to coordinate and deploy co-specialized assets and capabilities of complementors.” While platform governance manifests itself in different mechanisms, in this paper, we argue and show that platform owners can practice what we call “access control” to shape complementors’ innovative activities. Rather than looking at complementors’ economic exchange activities on a platform (e.g., listing and selling of mobile apps), we examine their exchange of knowledge (about developing apps) with each other. The “free” sharing of problem-solving techniques, code writing tips, and product development experiences, is critical to software development and has even been considered by some as underpinning the recent open source revolution.
We look at how the lack of access control in the form of “jailbreaking” shapes app developers’ knowledge sharing activities. Specifically, Apple’s iOS platform is well-known for adopting a strict gatekeeping policy that controls for what (apps) or who (app develops) have access to the platform; this policy denies platform access to imitating apps and developers in order to encourage app innovation. The jailbreak of the iOS—which was more common in the early years of iOS development—is a hacking that exploits loopholes to remove Apple’s built-in restrictions, allowing users to install apps not officially approved by Apple’s App Store. Jailbreaking would therefore introduce pirated apps that imitate or directly copy the features and functionalities of the existing apps approved by the App Store and trigger so-called business stealing and user attrition, putting a competitive pressure on those iOS developers who develop “legit” apps and seek to profit from app sales.
As illustrated in the figure below, we leverage the unexpected timing of the jailbreak of iOS 7 in 2013 as a natural experiment, to compare the Q&A activities of iOS app developers (treated group) and otherwise comparable Android app developers unaffected by the jailbreak (control group), on StackOverflow.com, an active online forum of software developers. The jailbreak significantly weakens (for a short period) Apple’s strict access control, such that imitating app developers (and apps) can now gain access to the App Store and users of iOS devices. We find that the jailbreak reduces the amount and quality of the knowledge shared by iOS app developers—their posting of Q&As decreases by 7%, and the quality of their posts by 15%. Such effects can be seen as causal given the research design.
The lapse in access control therefore dampens developers’ incentives to share knowledge (and innovate). In other words, strong access control, at least in the case of Apple’s iOS, will appear beneficial to the platform ecosystem and platform owner, because it enables more vibrant knowledge sharing among app developers, which should enhance their innovation and product development effort.
In practice, a platform owner can resort to other tools or design features to implement access control. These include charging a membership fee or implementing an involved process to weed out low-quality complementors (e.g., eHarmony charging registered users a non-trivial fee), designing certain screening processes to determine which complementors will be allowed platform access (e.g., Uber requiring drivers and their cars to pass certain criteria), and selectively restricting or opening up the use of boundary resources (e.g., APIs, SDKs, code libraries) to particular complementors. However, it’s important to note that none of these is meant to imply that stronger control is always “better.” In fact, the degree to which platform owners should grant access to complementors will depend on many factors, including the specific business model or ways in which platform owners profit from innovation. For instance, Apple makes a lot of profits from the commissions charged on app sales through its App Store, making it important that it implement strong access control to encourage the creation of high-quality apps. By contrast, for Google’s Android, most profits are coming from advertisement and related services; lesser access control does not affect it as much.
What other governance mechanisms, in addition to access control, may be at the platform owner’s disposal to coordinate and orchestrate complementors’ value creating activities? In a review article published in the Journal of Management, coauthored with Liang Chen, Shaoqin Tang, and Nianchen Han, we examine this question by reviewing existing knowledge on digital platforms written by scholars in management, MIS, marketing, operations, economics, and other related fields. This is done based on our view that although the leadership role of platform owners is well recognized, a coherent approach to understanding how they govern their relationship with complementors to create and appropriate value is still lacking. We use two core dimensions of organizational governance—incentive and control—to synthesize platform governance research into eight mechanisms, and we map them to a multitude of seemly idiosyncratic platform design tools and features, summarized in the figure below.
To conclude, platform governance matters a great deal. Our study shows that one specific form of platform governance, access control, matters to complementors’ innovation activity by encouraging cooperative behaviors in knowledge sharing. Before we herald openness as the holy grail of innovation, it is time to also celebrate the important role of platform control in motivating complementary innovation.
Zhang, Y., Li, J., & Tong, T. W. (2022). Platform governance matters: How platform gatekeeping affects knowledge sharing among complementors. Strategic Management Journal, 43(3), 599-626.
Does a meta-search platform favor its affiliated sales channels in its ranking?
This blog is written by Reinhold Kesler.
Digital platforms have become important intermediaries in many markets, be they traditional or newly created ones. Their key promise is to bring about lower search and distribution costs, better matches of market participants, and transparency about offers. However, they also have been shown to be able to steer consumers toward certain products and suppliers through their recommendations. This steering is increasingly often met with concern, especially with the presence of vertical integration of platforms along the consumer journey and possible incentives to bias the recommendation.
The corresponding policy debate is shaped by prominent cases of the European Commission that involve Google favoring its comparison shopping service over others and Amazon’s hybrid role as a marketplace and seller giving an edge over third party sellers. In this respect, the European Digital Markets Act (DMA), which entered into force in November 2022, aims to restrict the power of large online platforms that are designated as gatekeepers. These are subject to do’s and don’ts with regard to a range of business practices. One of the prohibitions comprises self-preferencing, which forbids treating own services and products more favorably than those of a third party.
In a recent study published in Quantitative Marketing and Economics, we explore self-preferencing in the context of online hotel booking. In particular, we empirically study whether an integrated meta-search platform favors its own affiliated sales channels. Meta-search platforms pool offers from different hotels – as do online travel agents like Booking.com and Expedia – but, in addition, for each hotel, they display the different sales channels available from which they predominantly retrieve payments through cost per click (CPC, see Figure 1, left). This gives a vertical and horizontal ranking, respectively (see Figure 1, right). The two rankings allow a price comparison on a more aggregate level, thereby making these platforms often the starting point of a consumer journey towards booking a hotel and economically relevant, according to a sector inquiry by the German competition authority. Interestingly, the two major online travel agents (Booking.com and Expedia) each own a meta-search platform (Kayak and Trivago), where the respective acquisitions raised concerns of search bias in favor of related sales channels.
We web-scraped search results for overnight stays in Paris from 2014 until 2017 on Kayak, the meta-search platform already belonging to the Booking Holdings at that time. In turn, we look at the determinants of both the vertical and horizontal rankings and, in particular, whether the company affiliation plays a role.
For the horizontal ranking, we find that online travel agents of the Booking Holdings are more often in the most prominent spot than they are among the cheapest sales channels. In regressional analyses accounting for differences in prices and popularity, among other factors, we indeed find Booking-affiliated online travel agents to be more likely among the visible and most prominent sales channels on Kayak than competing online travel agents. For the vertical ranking, the results suggest that hotels are ranked worse when rival online travel agents, i.e., the ones affiliated with the Expedia Group, are the cheapest sales channel. On average, such hotels are ranked eight positions worse. We do not find this pattern for the vertical ranking in an analogous empirical analysis on Google Hotels, a meta-search platform that is not vertically integrated with an online travel agent.
However, our empirical analysis is also subject to caveats. First, we are not able to observe the actual cost per click paid to Kayak by sales channels, which may vary and are presumably taken into account for the rankings. We try to address this by analysing the non-integrated meta-search platform Google Hotels, which potentially experiences a similar heterogeneity in payments and distinguishing chain and independent hotels, which may differ with respect to setting the CPC. Second, a concern may be the presence of systematic differences across sales channels unobserved to us (e.g., one channel having a breakfast option), which are potentially leading to better ranking positions. However, Kayak’s main goal is to provide comparability across offers, and Google Hotels may again serve as a benchmark, while this kind of differentiation of amenities is also not clear given similar commission rates across online travel agents.
Assuming these caveats to be less problematic, the results indicate that Kayak takes joint revenues of the integrated firm into account (i.e., both commissions and cost per click, see Figure 1) and that it favors affiliated sales channels.
Although we cannot provide a definite conclusion on a socially optimal ranking, there are potential risks of ranking optimization by a vertically integrated meta-search platform, as suggested by the results. First, such a ranking may diverge from consumer interests and, by this, lower search quality. Second, worse ranking positions that come along with lower prices elsewhere may work similarly to price parity clauses that have been abolished in some European countries and are also prohibited for gatekeepers designated under the DMA.
This brings us back to the policy debate revolving around the power of digital platforms and how to warrant a contestable and fair digital economy. Our article provides a case in point to study how vertical integration affects the recommendation of products and suppliers by a digital platform but also demonstrates the challenges of the empirical analyses which necessitate better data. More generally, such empirical studies can inform the crucial debate about the implementation and enforcement of regulations involving business practices like self-preferencing.
Cure, M., Hunold, M., Kesler, R., Laitenberger, U., & Larrieu, T. (2022). Vertical Integration of Platforms and Product Prominence. Quantitative Marketing and Economics, 20, 353–395.
It was another strong year for academic research on platform competition
In this post I take stock of the academic research on platform competition published in 2022. Using Platform Papers data, I look at the volume of research published across academic subdomains and how it compares to prior years. I further look at some of the themes covered by this research and how it maps on to developments in ‘the real world’. Finally, I briefly look ahead to 2023.
A look at the numbers
Management & Organizations: 39 papers
Information Systems: 24 papers
Marketing: 21 papers
Economics: 16 papers
The share of papers published in marketing journals this year stands out. While the disciplinary subsamples are fairly small and therefore volatile, it does seem that marketing scholars are increasingly interested in platform competition research: Whereas in 2018 papers published in marketing journals accounted for less than 3% of all papers added to the database, in 2022 this was 21%.
Management Science was by far the most prevalent outlet with 22 platform papers published in 2022 (of these, 13 were published in marketing departments). Other popular journals include Information Systems Research (12 papers) and the Strategic Management Journal (11 papers).
A look at the content
Thematically, there is a pretty even split between research covering issues related to ecosystem governance and orchestration (35 papers), research studying network effects, winner-take-all dynamics, and pricing (31 papers), and research addressing heterogeneity within and between platforms (31 papers). Corporate scope (e.g., platforms vertically integrating into the complementor space) received considerably less attention this year with 17 published papers.
Below I list five papers that got published in 2022 that I am particularly excited about:
Fending Off Critics of Platform Power with Differential Revenue Sharing: Doing Well by Doing Good? (Bhargava, Wang & Zhang; Management Science). I like this paper because it ties into the ongoing discussion about whether and how to regulate dominant platforms. The authors look at a very specific but oft-debated policy: dominant platforms changing their revenue sharing structure to be more favorable to smaller, less successful sellers. The economic model suggests that such a policy change not only benefits small sellers on the platform, but also larger sellers, and ultimately the platform itself. As the authors note: “Hence, an intervention that ostensibly offers concessions and generous treatment to producers might well be self-serving for platforms and good for the entire ecosystem.”
From proprietary to collective governance: How do platform participation strategies evolve? (O’Mahony & Karp; Strategic Management Journal). This paper tracks how a platform’s governance evolves over time and how it affects user participation on the platform. It’s another important contribution to illustrate that governance is highly dynamic and strategic. Platforms that open up attract higher participation rates, but participation by users declines when the platform’s framework of rules becomes unclear. (Twitter, anyone?!)
Positive Demand Spillover of Popular App Adoption: Implications for Platform Owners’ Management of Complements (Lee et al.; Information Systems Research). Traditional frameworks for analyzing competition do not unequivocally apply to platforms. Whereas competition from successful market participants can be detrimental in traditional markets, this paper finds strong empirical support for positive spill-over effects. Popular apps increase the adoption and usage of non-popular apps on the platform. These effects apply to apps released prior to the launch of the popular app as well as those released after.
Local Network Effects in the Adoption of a Digital Platform (Kim et al.; The Journal of Industrial Economics). Not all network effects are created equal and managers and academics are increasingly coming to grips with this. Studying the fantasy sports markets, this paper finds that “the size of a county’s existing user base on the platform significantly impacts the number of new adopters in that county, while the size of the user base in nearby counties does not.” In other words, participation by users that are more closely connected in the real world results in stronger network effects on the platform.
The Future of the Web? The Coordination and Early-Stage Growth of Decentralized Platforms (Hsieh & Vergne; Strategic Management Journal). This time last year some platform managers might have worried that decentralized platforms would soon put them out of work. The ‘Crypto Winter’ will have somewhat cooled those expectations, but decentralized governance of platforms certainly hasn’t gone away entirely either. This pioneering paper analyses 20 cryptocurrency platforms to better understand how decentralized platforms are governed. The authors document three distinct governance mechanisms: 1) algorithmic coordination, 2) social coordination, and 3) goal coordination.
Speaking of which, I am grateful for all the scholars who have contributed their time and knowledge by translating their platform competition research papers into digestible blogposts. While I highly recommend going back and reading all of these excellent blogs (as well as subscribe to ensure you don’t miss out on any future blogs), here are the three most read blogposts from 2022:
Big Tech Platforms’ Entry into Healthcare and Education (by Özalp, Ozcan & Gawer). This blog describes the process of ‘digital colonization’ where firms like Apple and Google enter highly regulated markets such as health care and education by deploying various forms of data capture to generate data-driven insights, ultimately translating into new products and services, while being mindful of the highly regulated and sensitive nature of these industries.
Platform Envelopment and Network Effects (by Allen, Chandrasekaran & Gretz). This blog describes how envelopment—the strategy of absorbing the core functionality of another, often complementary platform—can help new platforms reduce their dependence on network effects and solve the chicken-and-egg problem. The main idea is that by absorbing an outside technology, firms can increase the standalone value of their own platform.
When Freemium Succeeds (by Rietveld). In this blog, I discuss how social product features such as multiplayer modes for video games, ridesharing functionality in ride-hailing apps, and virtual collaboration tools in productivity software can both help and harm a freemium product’s widespread adoption in its respective market. Social features can generate network effects, but they may fall flat if the addressable market for a product is insufficient.
As regulation gets implemented and antitrust enforcement continues to target digital platforms, I am confident that 2023 will be another eventful year for platform competition research. My objective is to keep updating the references dashboard on a monthly basis and publish blogposts based on outstanding academic articles at similar intervals. I also hope to add some new functionality to the website and ensure it keeps running smoothly. Notably, I am part of the organizing team for the first summit of the European Digital Platform Research Network (EU-DPRN). This will be a two-day academic conference on digital platforms and ecosystems taking place on June 8 and 9th in Milan, Italy. The program will be accompanied by a one-day practitioner conference. More details to follow soon.
I hope you enjoy following Platform Papers and that you continue to do so in 2023. If you have any feedback or suggestions for improvements, feel free to reach out to me directly.
Happy New Year!
 The methodology for obtaining these inputs has remained the same. The methodology for obtaining papers is described in great detail in my platform competition review article in the Journal of Management.
 These numbers add up to more than 100 because some papers are assigned more than one theme.