How Users Drive Value in Two-Sided Markets: Platform Designs That Matter

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Publication History

Received: July 19, 2020
Revised: June 15, 2021; March 21, 2022; September 20, 2022; March 3, 2023
Accepted: April 19, 2023
Published Online in Issue: March 1, 2024

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This work is licensed under a Creative Commons Attribution 4.0 International License.

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Extant research has popularized the perspective that strong network effects produce “winner-take-all” outcomes, which leads platforms to invest in user growth and encourages investors to subsidize these platforms. However, user growth does not necessarily imply strong user stickiness. Without user stickiness, strong network effects in the current period may fade in future periods, thus rendering a user growth strategy ineffective. By adding a time dimension to network effects, we developed a model of cross-period and within-period network effects to explain how different types of network effects drive value. We emphasize that the cross-period same-side network effect contributes to user stickiness, while the within-period cross-side network effect persists conditional on user stickiness. We propose that one reason for platforms having heterogeneous cross-period same-side network effects is because of the “product learning” mechanism: it is expected that products with higher uncertainty have a stronger cross-period same-side network effect. Based on different drivers, we extend the customer lifetime value model (CLV2) to two-sided platform markets, allowing us to measure how different interventions drive platform value. Using Groupon data, we verify our insights and discuss platform design choices that enhance user stickiness when the cross-period same-side network effect is weak.

Additional Details
Author Zhou Zhou, Lingling Zhang, and Marshall Van. Alstyne
Year 2024
Volume 48
Issue 1
Keywords Two-sided markets, network effects, user growth strategy, customer lifetime value, platform design, user stickiness, product learning, experience goods
Page Numbers 1-30
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