How Users Drive Value in Two-sided Markets: Platform Designs that Matter

Abstract

Extant research has popularized the perspective that strong network effects produce “winner-take-all” outcomes. This leads platforms to invest in user growth and encourages investors to subsidize them. However, without user stickiness, strong network effects in the current period may fade in future periods, so a user growth strategy is not effective. By adding a time dimension to the network effects, we develop a model of cross-period and within-period network effects to explain how different types of network effects drive value. We emphasize that the cross-period same-side network effect contributes to user stickiness while the within-period cross-side network effect persists to be conditional on user stickiness. We theorize that one reason platforms have heterogeneous cross-period same-side network effects is because of the product learning mechanism: products with higher uncertainty can expect a higher cross-period same-side network effect. Using Groupon data, we verify our theoretical insight and discuss platform design choices that enhance user stickiness when the cross-period same-side network effect is weak.