Platforms and the Exploration of New Products

Abstract

A key strategic decision for platforms is the extent to which they should facilitate the entry of untested new products and sellers alongside established products and sellers. Exploration by current buyers helps future buyers better value these products and sellers. This externality across buyers raises the possibility that there may be too little exploration from the platform’s perspective. On the other hand, when sellers have market power and so price strategically, and platforms extract a share of seller revenue (i.e., charge commissions), the direction of any such bias is not obvious. We provide a theory that predicts when the platform will prefer more, less, or the same level of exploration as that induced by sellers in equilibrium. Our theory can explain why platforms will sometimes have no incentive to steer buyers one way or another, or may actually want to steer buyers toward established products and sellers. This paper was accepted by Joshua Gans, business strategy.