When Does a Platform Create Value by Limiting Choice?

Authors


  • We thank two anonymous referees and the coeditor for helpful comments that have helped improve the paper. We also thank Kevin Boudreau, Kenneth Corts, Jim Dana, Eric Darmon, Chris Dellarocas, Nicholas Economides, Joshua Gans, Andres Hervas-Drane, Doh-Shin Jeon, Elon Kohlberg, Matt Mitchell, João Montez, Emre Ozdenoren, Al Roth, Mike Ryall, Catherine Tucker, Dennis Yao, Pai-Ling Yin, Feng Zhu, seminar participants at HEC Paris, the Second Annual Searle Center Conference on Internet Search and Innovation, IIOC 2011, INSEAD, Wharton, Universitat Autònoma de Barcelona, HBS Strategy Unit Research Day and Brown Bag seminars, MIT IO lunch, NET Institute conference, Toronto Rotman, London Business School, the 2011 North American Summer Meetings of the Econometric Society in St. Louis, the 2011 European Summer Meetings of the Econometric Society in Oslo, the Second Annual Searle Center Conference on Internet Search and Innovation in Chicago, and the 9th ZEW Conference: The Economics of Information and Communication Technologies, Mannheim. We also thank Adrianna Lohnes for expert assistance. Yusuke Norita provided excellent research assistance. We gratefully acknowledge financial support from the NET Institute (www.netinst.org) and the HBS Division of Research and Faculty Development.

Abstract

We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (to better satisfy their individual preference for variety, users have an incentive to consume more applications than the number that maximizes joint utility); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems and create value by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the allocation that maximizes users' utility); eliminate equilibria that give lower utility to the users; and reduce the severity of the coordination problem faced by users.

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