Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization

Abstract

A repeated challenge in launching a two-sided market platform is how to ignite the cross-side network effects to jumpstart adoption. Prior literature often addresses this issue by using pricing controls – a high price on one side to raise the margin and a low price on the other to attract users – or the “seesaw principle.” More recently, platforms are increasingly embracing non-pricing controls to accelerate user adoptions. Little is known, however, about the role of non-pricing controls and their interplay with pricing controls. In this research note, using a game-theoretic framework, we study “piggybacking” – i.e., expanding the focal market to recruit exclusive users from external networks – as a new and non-pricing control to launch platforms in conjunction with pricing controls. We first consider consumer-side piggybacking. In a standard “competitive bottlenecks” setting where consumers single-home and providers multi-home, we provide a rich set of novel insights into strategies that platforms use to monetize exclusive access to external users, with non-trivial characterizations of the interplay among piggybacking, cross-side network effects, and price competition. We identify necessary and sufficient conditions when piggybacking is profit improving and when it leads to a prisoner’s dilemma, depending on the piggybacking cost and strengths of cross-side network effects. Among others, we show that if the platforms’ equilibrium strategies were to subsidize consumers (when provider-side network effects are stronger than consumer-side network effects), piggybacking may intensify rather than ease price competition. In contrast, if the platforms’ equilibrium strategies were to subsidize providers (when provider-side network effects are weaker than consumer-side network effects), piggybacking may ease price competition. Interestingly, piggybacking reinforces the seesaw principle for the piggybacking platform. We provide a full characterization on such non-trivial equilibrium outcomes. We then consider provider-side piggybacking, and we show that the insights are qualitatively the same as consumer-side piggybacking except that the prisoner’s dilemma disappears if piggybacking providers multi-home. Managerial implications for platform practitioners are also discussed.