Multi-homing Consumers Research Articles

How Does Competition Affect Exploration vs. Exploitation? A Tale of Two Recommendation Algorithms

Through repeated interactions, firms today refine their understanding of individual users’ preferences adaptively for personalization. In this paper, we use a continuous-time bandit model to analyze firms that recommend content to multihoming consumers, a representative setting for strategic learning of consumer preferences to maximize lifetime value. In both monopoly and duopoly settings, we compare a forward-looking recommendation algorithm that balances exploration and exploitation to a myopic algorithm that only maximizes the quality of the next recommendation. Our analysis shows that, compared with a monopoly, firms competing for users’ attention focus more on exploitation than exploration. When users are impatient, competition decreases the return from developing a forward-looking algorithm. In contrast, development of a forward-looking algorithm may hurt users under monopoly but always benefits users under competition. Competing firms’ decisions to invest in a forward-looking algorithm can create a prisoner’s dilemma. Our results have implications for artificial intelligence adoption and for policy makers on the effect of market power on innovation and consumer welfare. This paper was accepted by Dmitri Kuksov, marketing. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4722 .

Multi-Homing Revisited: Level of Adoption and Competitive Strategies

Aided by the increasing ease of use, lower adoption cost, and higher network benefits, consumers are demonstrating a strong propensity to concurrently use competing firms’ products or services. Depending on their relative preference for a firm, such “multi-homing” consumers may adopt each firm partially and therefore contribute to the network benefits of no firm fully, as would be the case with single-homing. Consumers’ level of adoption of competing products is a key feature of multi-homing, which, while observed widely in practice, has not previously been studied in the literature. Through a series of analytical models, we demonstrate the important role of this construct in the pricing and capability-related decisions of competing firms. Our results provide several new insights, which suggest that as multi-homing (M) settings become common across industries, technology strategists and managers should exercise caution against simply extrapolating insights from single-homing (S) settings, where consumers adopt only one firm, or from M settings, where the level of adoption is not accounted for. Specifically, in markets where competing products are not well differentiated, contrary to intuition, we find that under price competition, a firm’s profit can be hurt by high levels of adoption by multi-homing consumers; further, in markets where prices are inflexible, a firm with a higher level of adoption can succeed even with a lower level of capability innovation relative to that of an S setting. In contrast to single-homing settings, we show that firms in M settings need to mitigate uncertainty regarding network benefits if the level of adoption is low. Finally, we explore the role of adoption level in two-sided markets and demonstrate that if one side does not have a strong preference for a platform, then, contrary to prevailing wisdom, the latter need not strongly subsidize the other side of the market.

Exclusive content in two‐sided markets

AbstractThis study investigates the role of exclusive content provision in two‐sided markets in which both sides are allowed to join multiple platforms. We consider a model of duopolistic two‐sided platform market with a monopolistic multiproduct firm (content provider) on one side and consumers on the other. The model demonstrates that the monopolistic content provider uses exclusivity as strategic commitment to balance two opposite effects on its bargaining power: the positive effect caused by the increase in multihoming consumers and the negative effect caused by the restriction of distribution channels.

Intermediaries in the Online Advertising Market

A large share of the ads displayed by digital publishers (e.g., newspapers and blogs) are sold via intermediaries (e.g., Google), that have large market power and reportedly allocate the ads in an opaque way. We study the incentives of an intermediary to disclose consumer information to advertisers when auctioning ad impressions. We show that disclosing information that enables advertisers to optimize the allocation of ads on multi-homing consumers is profitable to the intermediary only if advertising markets are sufficiently thick. In turn, we study how disclosure affects the incentives of publishers to outsource the sale of their ads to an intermediary, and relate these incentives to the extent of consumer multi-homing, the competitiveness of advertising markets and the ability of platforms to profile consumers. We show that, even when most consumers multi-home, the publishers may be worse off by outsourcing to the intermediary, in particular if they operate in thin advertising markets. Finally, we study how the intermediary responds to policies designed to enhance transparency or consumer privacy, and the implications of these policies for the online advertising market.

Platform Oligopoly with Endogenous Homing: Implications for Free Entry and Mergers

Consumer multi-homing is considered to be critical for competition policy regarding digital platforms. To assess the role of consumer multi-homing in competition policy toward platforms, we develop a new framework that embeds consumer multi-homing in two-sided market into the otherwise standard model of Cournot oligopoly and apply it to free entry and mergers. We find that the equilibrium level of platform entry is insufficient given the presence of consumer multi-homing, and a required level of merger-specific cost reduction is larger if the fraction of multi-homing consumers is larger. These results together provide a caution to the popular belief that multi-homing mitigates the need for a strict implementation of competition policy.

Choosing your battles: endogenous multihoming and platform competition

We study how digital platforms can choose competitive strategies to influence the number of multihoming consumers. Platforms compete for consumers and advertisers. A platform earns a premium from advertising to singlehomers, as it is a gatekeeper to these consumers. Competitive strategies leading to intense competition on the consumer side reduce profits on that side, but also increase consumer singlehoming and hence market power over advertisers. The size of the singlehoming premium determines where this competitive strategy ‘seesaw’ will end up. We apply this insight to four strategic choices that may increase singlehoming: reducing product differentiation, portfolio diversification through conglomerate mergers, the choice of compatibility and tying.

Asymmetric Product Line and Multi-Homing

This paper examines vertical relationships in which a monopolistic upstream producer supplies a product through downstream distributors to consumers who may access multiple distributors (i.e., multi-homing). Given that there are multi-homing consumers, exclusive supply of a product induces more consumers to multi-home than non-exclusive supply. Consequently, the upstream firm deals with only one of the distributors exclusively without any contractual arrangements. We also show that forcing non-exclusive supply on the producer may worsen welfare as a result of the reduction of multi-homing consumers.

Content Provision in the Media Market with Single-Homing and Multi-Homing Consumers

AbstractIn this paper, we analyze the effects on content provision in the news market of single-homing (i.e. when readers consume news from just one outlet) and multi-homing (i.e. when readers can choose to consume news from competing outlets). Media firms compete on content provision and on advertising revenues. Readers have an ideal variety of content and experience a disutility from consuming news that differs from their ideal variety. In addition, readers have a preference for single-homing and for multi-homing. In this set-up, we show that media firms only diversify content with single-homing, but not with multi-homing. The reason for this is that competition for readers and advertising is lower under multi-homing than under single-homing, since multi-homing readers consume from all media outlets. We derive the consequences of single-homing and multi-homing for profits, consumer surplus and social welfare. We also discuss the implications of our results for the current debate in the media market related with social media and echo chambers.

Research on the Pricing Strategy of “Internet +” Recycling Platforms in a Two-Sided Network Environment

“Internet +” platform recycling is an emerging business model with two-sided market characteristics. How to meet the needs of consumers and manufacturers and how to formulate a reasonable two-sided pricing structure have become challenges faced by recycling trading platforms. Based on the theory of a two-sided market, the pricing mechanism of a monopoly platform and a model of competing platforms are studied. Consequently, a sensitivity analysis and comparison analysis are conducted, giving a pricing decision and the optimal profit of closed-loop supply chain systems. Finally, through a numerical simulation analysis, the impacts of the inter-group network externalities, service differentiation, and the matching efficiency on e-waste recycling prices and profits are obtained. The result indicates that the influences of inter-group network externalities on monopoly platforms and competing platforms are different; thus, platforms should choose pricing strategies according to their own market position. The pricing of the two types of platform is inversely proportional to the time-sensitive coefficient of the two platforms, while it is directly proportional to the matching efficiency. The improvement of the differentiation of service will increase the pricing of the platform for single-homing manufacturers without affecting the multi-homing consumers, and profits will increase accordingly.

Tax-free digital news?

News platforms are struggling. Their printed readership is predominantly old, and their digital product struggles to win the attention of the young. For several decades tax reductions have been used in Europe to increase the circulation of printed newspapers. Would extending these reductions to digital platforms stimulate digital consumption? Using a two-sided pricing model where a print platform and a digital platform compete for multi-homing consumers and advertisers we show that the answer is no. The two-sidedness of the market means that the digital price would increase. Not only would digital circulation decrease but so too would the fraction of consumers that access news from both platforms. Key media policy goals of reach (circulation) and pluralism (multi-homing) would be harmed.

Beyond the Last Touch: Attribution in Online Advertising

Online advertisers often utilize multiple publishers to deliver ads to multihoming consumers. These ads often generate externalities and their exposure is uncertain, impacting advertising effectiveness across publishers. We analyze the inefficiencies created by externalities and uncertainty when information is symmetric between advertisers and publishers, in contrast to most previous research that assumes information asymmetry. Although these inefficiencies cannot be resolved through publisher-side actions, attribution methods that measure campaign uncertainty can serve as alternative solutions to help advertisers adjust their strategies. Attribution creates a virtual competition between publishers, resulting in a team compensation problem. The equilibrium may potentially increase the aggressiveness of advertiser bidding, leading to increased advertiser profits. The popular last-touch method is shown to overincentivize ad exposures, often resulting in lower advertiser profits. The Shapley value achieves an increase in profits compared with the last-touch method. Popular publishers and those that appear early in the conversion funnel benefit the most from advertisers using last-touch attribution. The increase in advertiser profits comes at the expense of total publisher profits and often results in decreased ad allocation efficiency. We also find that the prices paid in the market will decrease when more sophisticated attribution methods are adopted. The online appendix is available at https://doi.org/10.1287/mksc.2018.1104 .

Multi-Homing and Platform Strategies: Historical Evidence from the U.S. Newspaper Industry

We examine how heterogeneity in customers’ multi-homing tendencies affects a platform’s response to new entrants in its market. We develop a formal model to generate empirical predictions and then test them leveraging a historical setting: TV broadcast station entry into local newspaper markets from 1945–1963. We show that after a TV station enters the newspaper market, newspaper firms with more multi-homing consumers had higher subscription prices, circulation, and ad rates. These results suggest that heterogeneity in customer multi-homing is a significant factor that can moderate platforms’ competitive strategies.

Competition for Advertisers and for Viewers in Media Markets

Standard models of advertising-financed media assume consumers patronise a single-media platform, precluding effective competition for advertisers. Such competition ensues if consumers multi-home. The principle of incremental pricing implies that multi-homing consumers are less valuable to platforms. Then entry of new platforms decreases advertisement prices, while a merger increases them, and advertisement-financed platforms may suffer if a public broadcaster carries advertisements. Platforms may bias content against multi-homing consumers, especially if consumers highly value overlapping content and/or second impressions have low value.

Exclusive Content in Two-Sided Markets

This study investigates the role of exclusive content provision in two-sided markets where both sides are allowed to join multiple platforms. We consider a model of duopolistic two-sided platform market with a monopolistic multi-product (content) firm on one side, and consumers on the other. The model demonstrates that the monopolistic content provider uses exclusivity as strategic commitment to balance the two opposite effects on its bargaining power: the positive effect caused by increase in multi-homing consumers and the negative effect caused by restriction of distribution channels.

Optimal Price/Advertising Menus for Two-Sided Media Platforms

We develop a model of two-sided media platforms in order to derive optimal pricing strategies. An advertiser values consumer ad exposure on the platform while a consumer values the platform's media content, but dislikes advertising. In such a setting, we show that platforms can achieve optimal profit with subscription based prices. When platforms have incomplete information about consumer advertising preferences, we show the optimal subscription price menu requires altering complete information optimal prices by decreasing advertising quantities for consumers who dislike advertising most, and decreasing price for those who dislike advertising least. Using this result, we characterize when the platform's optimal menu allows the consumer to choose between free use with ads versus a paid subscription for no ads, similar to menus observed for media streaming services on the internet. We further establish that both prices and advertising quantities can rise when moving from monopoly to duopoly if agents multi-home (use both platforms), but consumer welfare still improves because total consumption increases, creating more market surplus. However, if agents single-home (use one platform) in duopoly, Bertrand-like competition decreases consumer prices and drives platform profits to zero, suggesting platforms may prefer multi-homing consumers. Finally, our model predicts unstable prices in two-sided media markets, as platforms tend to have an incentive to change agent behavior through altering prices.

Net Neutrality and internet fragmentation: The role of online advertising

We investigate the relation between Net Neutrality regulation and Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs), and CPs sell consumers' attention to advertisers. Under Net Neutrality, a zero-price rule is enforced. By contrast, in the Unregulated Regime, ISPs make access to their subscribers for CPs conditional on payment of a termination fee. Multiple impressions of an ad on the same consumer are partially wasteful. Thus, equilibrium ad rates decrease when audiences overlap. We show that ISPs may strategically set termination fees to induce fragmentation. This takes place when advertising revenues are potentially large but strongly diminished by competition among CPs, and when consumers are not highly sensitive to content availability. We therefore identify an important link between termination fees, the online advertising market and Internet fragmentation. We extend the model to account for multi-homing consumers, vertically integrated ISPs, third-party advertising platforms and heterogeneous CPs.

Differentiation with User-Generated Content

This paper studies competition between firms whose “products” (content) are generated by their customers (users). Video sharing sites, social networks, online games, etc. all rely heavily on user-generated content and have been growing significantly in the last decade. We model a Hotelling style market in which consumers have heterogeneous tastes along a circular city. In a first step, we consider two ex ante identical firms whose offerings entirely depend on user-generated content. Consumers contribute content to the firm they join and benefit from the content provided by the others, their valuation being higher the closer the content contributor is to the content consumer (i.e., there are local network effects). In such a setting, we show that ex ante identical firms can acquire differentiated market positions that spontaneously emerge from user-generated content. Moreover, such differentiation may take interesting patterns, wherein a firm simultaneously attracts multiple distinct consumer segments that are isolated from each other. Greater segregation, measured by the number of disjoint segments in each platform, reduces consumer valuation for content, but interestingly, it intensifies firm competition. We show that this insight can help us refine the set of possible equilibria. In a second step, we consider firms that explicitly differentiate their offerings by generating some content on their own. We show that user-generated content may strengthen or defeat firms' intended positioning (i.e., firms attract consumers located opposite to their chosen positions) and consumer surplus may be higher in the latter case. Finally, we allow multihoming by consumers and show that the previous equilibrium patterns remain valid, but in most equilibria, a subset of consumers (located between rival firms' core clienteles) are multihomers. More multihoming consumers imply reduced differentiation and higher degree of platform competition. We relate these findings to anecdotal evidence and explore their strategic implications for competing firms relying on user-generated content. This paper was accepted by J. Miguel Villas-Boas, marketing.

A Competitive Analysis of Web 2.0 Communities: Differentiation with User-Generated Content

This paper studies the competition between Web 2.0 communities in a game theoretic framework. We model three important features of these institutions: (i) firms' content is usually user-generated; (ii) consumers' content preferences are governed by local network effects, and (iii) consumers have strong tendencies to multi-home. Our analyses reveal that ex-ante identical community sites can acquire differentiated market positions that spontaneously emerge from user-generated content. Moreover, sites may obtain unanticipated and sometimes ambiguous market positions, wherein one site simultaneously attracts distinct and isolated consumer segments that seldom interact. Spontaneous differentiation reduces firm competition but may imply too much consumer segregation and lower social welfare. In most equilibria, a subset of consumers multi-home. We show that the degree of spontaneous differentiation increases in the localness of network effects. Interestingly, more multi-homing consumers imply reduced differentiation and intensify site competition. In one extension, we show that market growth tends to lead to lower market concentration, in contrast to the prediction by the classical horizontal differentiation model. We also study competing sites' community design strategies and provide conditions under which sites reduce or enhance user connectivity within their communities, leading to maximal and minimal spontaneous differentiation respectively.

Targeted Advertising in Magazine Markets and the Advent of the Internet

This paper examines how the ability of traditional media firms to engage in targeted advertising has changed with the advent of the Internet. We find that the premium for reaching a homogeneous audience increases for magazines that have a companion website, as well as for those whose readers are more likely to be online. This indicates a complementarity between offline and online channels with respect to targeted advertising. We hypothesize that this result is driven by multihoming consumers who enhance the value of targeted advertising, in contrast to the usual assumption that multiple advertising messages are redundant. This paper was accepted by Pradeep Chintagunta, marketing.

Targeted Advertising in Magazine Markets and the Advent of the Internet

This paper examines how the ability of traditional media firms to engage in targeted advertising has changed with the advent of the Internet. We find that the premium for reaching a homogeneous audience increases for magazines that have a companion website, as well as for those whose readers are more likely to be online. This indicates a complementarity between offline and online channels with respect to targeted advertising. We hypothesize that this result is driven by multi-homing consumers who enhance the value of targeted advertising, in contrast to the usual assumption that multiple advertising messages are redundant.