Network externalities and consolidation in the dating website industry

Abstract

Network externalities—i.e., effects on consumers' alternative-specific pay-offs of other consumers' decisions—arise in many economic settings. This paper considers the identification of discrete-choice models featuring network externalities and then uses such a model to analyze how network externalities in the market for dating websites in the United States contribute to the effects of consolidation in that industry. My identification analysis shows that discrete-choice models with network externalities are generally not identified with market-level data alone, but that microdata allows the researcher to construct instrumental variables that identify the model. Using rich online browsing data, I estimate a model of consumer choice of dating website and find evidence of considerable network externalities. In my preferred specification, an inframarginal user of a site values a 10% increase in the site's usership at $11.11/month, which is about one third of the most popular site's price. I use my estimates to assess whether the observed extent of network externalities imply that increased market concentration would benefit consumers. I find that welfare losses from decreased variety and increased prices outweigh the gains from network externalities associated with a move from the observed market structure to monopoly. Platform differentiation may explain why platform integration has not followed consolidation in the dating websites industry.