Smaller Slices of a Growing Pie

The effects of seller entry and demand expansion in platform markets

Platform Papers is a monthly blog about platform competition and Big Tech. The blog is linked to, an online repository that collects and organizes academic research on platform competition.

This blog is written by Oren Reshef

From retail, to travel, to financing, a large part of economic activity now takes place within platform markets. In fact, seven of the top ten most valuable companies are platforms as well as more than half of the most promising start-ups. Platforms’ influence continues to grow as more and more sellers now operate fully, or at least partially, within a platform setting. An important question that rises is how does the rapid expansion of platforms affect platform participants? While consumers are likely to benefit from expansion, the impact on sellers remains unclear and has important implications to platforms’ long-term growth and sustainability.  

Imagine a seller on Amazon or a driver offering rides through Uber. If Uber decided to recruit additional drivers in her area, what would be the impact on the driver? In traditional markets, the intuition should be straight forward—as more sellers enter the market, competition for consumers becomes fiercer and ultimately hurts the sellers’ bottom line. In platform markets, the analysis is more complex.

Platforms are characterized by network effects, meaning that the value of the platform depends on the number of users, both consumers and sellers. In our example, if there are only a handful of drivers in a given city, then passengers are unlikely to opt into using the platform, as it is likely to be associated with longer wait times and higher prices. As more drivers join the platform, it becomes more appealing to potential users. Simply put, if there are more things to find on the platform, then more people will search. The increase in the consumer base has the potential to indirectly benefit the driver by providing more requests. The total effect of entry is thus theoretically ambivalent: on the one hand, the total number of transactions grows, but on the other hand each seller’s “slice” becomes smaller.

Empirically answering this question poses several challenges. Simply examining the relationship between firm performance and number of sellers may lead to misleading results as sellers are likely to strategically opt into market segments with higher demand or more favorable conditions, driving a positive correlation between number of sellers and performance. Continuing with our previous example, a busy downtown area is likely to be crawling with Uber drivers, precisely because they expect to find multiple passengers in need of a ride.

I tackle this question in a recent paper published in the American Economic Journal: Microeconomics. To address the empirical challenge, I obtain data from Yelp Transaction platform (YTP), a subset of the Yelp review website that allows consumers to directly order food deliveries from local restaurants. I take advantage of YTP’s partnership with GH delivery service which came into effect in 2018. Following the partnership, all restaurants affiliated with Grubhub, at the time the largest food delivery service in the Unites States, became available on the YTP platform as well. The number of added businesses depended on the pre-partnership networks of Grubhub and YTP in various cities. It turns out that some areas experienced large overnight increases in the number of available restaurants, while other cities experienced modest or even no changes.

Consistent with the intuition provided above, I begin by documenting substantial network effects in food ordering. In areas that experienced large entry there is also a sharp increase in the number of new consumers and total transactions on the platform. Of course, these transactions are now split between more businesses.

Focusing on the incumbent businesses, those that were already on the platform prior to the partnership, reveals that the market size effect dominates the negative effect of increase competitive pressure—on average, incumbent business experienced a modest increase in revenue generated on the platform.

More interestingly, it turns out that the average increase masks substantial heterogeneities across sellers. In further analysis, I decompose the effect by the type of seller, focusing on their Yelp Star Rating, which is based on millions of reviews left by previous diners for each restaurant (in a previous paper with Michael Luca, we find that ratings capture the net value, or bang-for-buck from a particular establishment). The analysis reveals that the positive effects are concentrated at high-rated businesses who gain substantial increases in both sales and revenue (up to 15%). The increases are driven primarily by their ability to attract the new customers and retain existing ones. In contrast, low-rated business suffer a sharp decrease (approximately 10%) in their weekly revenue. 

The findings above mean that gaps between high- and low-quality sellers become more pronounced as the platform grows, and the return to being high-quality grows.

How do restaurants respond to entry? The findings above mean that gaps between high- and low-quality sellers become more pronounced as the platform grows, and the return to being high-quality grows. If restaurants can improve their rating, for example by shortening delivery times, then we would expect them to have additional incentives to do so. The data confirms this intuition: Looking at the changes in ratings following the partnership, I find that entry leads existing businesses to invest more in quality and differentially improve their ratings.

What are the implications to businesses operating in platform markets and regulators? The results suggest that, as the platform adds more businesses, it doesn’t just become bigger but also, on average, better. This occurs through several channels: first, when more firms join the platform, consumers tend to choose higher quality businesses. Second, the increased competition creates incentives for firms to invest in quality, as apparent in their Star Ratings.

The restaurants on YTP had little power to block (or promote) the new partnership. However, in many other settings, such as ride-hailing services or the video game console industry, platform participants often lobby to restrict access of new suppliers. It appears that, contrary to traditional markets, the benefits from platform expansion may spillover to other platform participants, especially the top-quality ones. Moreover, if high-quality businesses thrive in larger platforms, then we can expect them to opt into larger platforms. While not the focus of this paper, this provides another channel driving the relationship between larger and better platforms.

Finally, recent regulation, such as the Digital Markets Act in the European Union and the American Innovation and Choice Online Act in the United States, attempts to reduce the power and influence of big technology firms. Antitrust regulation is a multifaceted and complex problem, which entails many, often conflicting, objectives. That said, this research highlights some of the advantages of larger, more established platforms—restricting platform size may limit the ability to enjoy some of these benefits.

This blog is based on Oren’s research, which is published in American Economic Journal: Microeconomics and is included in the Platform Papers references dashboard:

Reshef, O. (2023). Smaller slices of a growing pie: The effects of entry in platform markets. American Economic Journal: Microeconomics, 15(4), 183-207.

Platform-Paper Updates

A quick update before we head into the long weekend: I gave an interview for the Platform Law Blog—a blog about competition, regulation and privacy in the digital era. The PLB is a great source for everything related to digital platforms and the issues they raise for competition policy, regulation and privacy. It is run by the law firm Geradin Partners. In case you missed it, earlier this month Damien Geradin and Stijn Huijts from Geradin Partners contributed a blog to Platform Papers about the Digital Markets Act and the affected gatekeepers’ compliance plans. It’s a must read!

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