December 14, 2018
Dec 12 2018

Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization

12:00 pm — HBS Cotting House Conference Room

Digital Seminar Series: D.J. Wu, Scheller College of Business at the Georgia Institute of Technology. This event is open to faculty, doctoral students, and academic researchers. 

Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization

Abstract: A repeated challenge in launching a two-sided market platform is how to solve the “chicken-and-egg” problem. The solution often suggested in the literature is subsidizing one side of the market to jumpstart adoption of the platform. In this paper, using a game-theoretic framework, we study piggybacking – importing users from external networks – as a new approach to launching platforms. First, in the presence of piggybacking, we solve for the platforms’ optimal pricing/subsidization strategies. Benchmarked with the case of no piggybacking, we find that, although piggybacking changes the degree of platform subsidization, it does not change the conditions for doing so. Second, we show that piggybacking can either intensify or mitigate price competition among platforms and we identify under which conditions each scenario happens. We also show when subsidization can complement piggybacking. Third, we show that these findings are robust to an extension when piggybacking is endogenized (i.e., external users need to be purchased). Finally, we depart from authentic piggybacking by examining fabricated piggybacking, that is, when imported external users (e.g., zombies or fake users) generate network effects but no revenue. We show that fabricated piggybacking, in contrast to authentic piggybacking, affects the platform’s subsidization conditions and undermines profits for the competing platform. Managerial implications for platform practitioners are also discussed. Full paper available at SSRN´s eLibrary.

A buffet lunch will be available at 11:45 a.m. The talk will begin at 12:00 p.m.

Featuring

  • DJ Wu, headshot

    D. J. is the Ernest Scheller Jr. Chair in Innovation, Entrepreneurship and Commercialization, Professor of Information Technology Management, and Area Coordinator in Information Technology Management at the Scheller College of Business, Georgia Institute of Technology.

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