On average, consumers are not substantially better off with a single combined platform than with multiple separate and competing platforms, a study finds
The emergence of a handful of dominant digital platforms that effectively face no competition has raised several concerns globally. Such platforms justify their monopoly by citing the “network effect": they work best when more and more people use them, such as Facebook and WhatsApp. But a new study contradicts this widespread belief.
In a working paper published by the US National Bureau of Economic Research, researchers find that consumers benefit more when multiple platforms compete in giving a service, despite the network effect advantage associated with a single platform.
Chiara Farronato of Harvard Business School and others use a natural experiment, in which they study the market outcome of the acquisition of one online pet-sitting service platform by another. They find no evidence to suggest that the combined platform improved market outcomes more than the sum of the two separate platforms.
The acquiring platform does experience network effects: existing users see their choice sets expand from the influx of users from the acquired platform, and so increase their own participation. However, at the market level, there is no material increase in the number of transactions, match rates and prices, the authors find.
This is because some users of the acquired platform leave the market due to the cost of switching to another platform and reduction in variety. The users of the acquiring platform therefore benefit at the expense of users of the acquired platform, who are leaving the market.
Thus, having a variety of platforms is valuable for consumers. In the authors’ experiment, the two platforms were very similar in the way they delivered their services. Yet, the negative effects of user attrition and reduction in variety outweighed the network effects. Such negative effects are likely to be even larger when the two merging platforms differ significantly from each other.