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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29854
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| Title: | When Does a Platform Create Value by Limiting Choice? |
| Authors: | Casadesus-Masanell, Ramon - Harvard Business School
Halaburda, Hanna - Harvard Business School |
| Issue Date: | 2010 |
| Series/Report no.: | NET Institute Working Paper;10-04 |
| 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 (users have an incentive to consume more
applications than the social optimum to better satisfy their preference
for variety); (ii) an equilibrium selection problem (consumption
complementarities often lead to multiple equilibria); 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 by limiting the
number of applications available. By limiting choice, the platform may
create new equilibria (including the socially efficient allocation),
destroy Pareto-dominated equilibria, and reduce the severity of the
coordination problem faced by users. |
| URI: | http://hdl.handle.net/2451/29854 |
| Appears in Collections: | NET Institute Working Papers Series
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