Platform Competition under Network Effects: Piggybacking and Optimal Subsidization
by
D. J. Wu
Ernest Scheller Jr. Chair in Innovation, Entrepreneurship and Commercialization
Professor, Area Coordinator, Information Technology Management
Georgia Institute of Technology
Scheller College of Business
Friday, October 11
10:30 – 12:00 pm | Speakman 200
Abstact:
A repeated challenge in launching a two-sided market platform is how to solve the “chicken-and-egg” problem. The solution often suggested in the literature is subsidizing one side of the market to jumpstart adoption of the platform. In this paper, using a game-theoretic framework, we study piggybacking — importing users from external networks — as a new approach to launching platforms. Our finding suggests that optimal use of the piggybacking strategy depends on the cross-side network effects. First, benchmarked with the case of no piggybacking, we find that the pricing impacts of piggybacking is non-trivial. It may help mitigate or avoid price competition. Second, we show that platform duopoly with piggybacking can become a “game of chicken” or even a prisoner’s dilemma, which implies that platforms are not always better off (sometimes even worse off) with piggybacking. Finally, when piggybacking users are fabricated (e.g., zombies or fake users), the platform strategies differ greatly from the authentic piggybacking case. It also undermines both the competing platform’s profit and the providers’ surpluses. Managerial implications for platform practitioners are also discussed