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      Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger
      14 Jan 2021Working Paper Summaries

      Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger

      by Chiara Farronato, Jessica Fong, and Andrey Fradkin
      With heated debate over antitrust regulation of online platforms, this study finds that when a larger platform acquired its greatest competitor, users were not better off with a single platform compared with two competitors, despite marked efficiency improvements experienced by the acquiring platform.
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      Author Abstract

      Digital platforms are increasingly the subject of regulatory scrutiny. In comparison to multiple competitors, a single platform may increase consumer welfare if network effects are large or may decrease welfare due to higher prices or reduction in platform variety. We study the net effect of this trade-off in the context of the merger between the two largest platforms for pet-sitting services. We exploit variation in pre-merger market shares and a difference-in-differences approach to causally estimate network effects at the platform and market level. We find that consumers are, on average, not substantially better off with a single combined platform than with two separate and competing platforms. On one hand, users of the acquiring platform benefited from the merger because of network effects. On the other hand, users of the acquired platform experienced worse outcomes. Our results highlight the importance of platform differentiation even when platforms enjoy network effects.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: November 2020
      • HBS Working Paper Number: NBER Working Paper Series, No. 28047
      • Faculty Unit(s): Technology and Operations Management
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      Chiara Farronato
      Chiara Farronato
      Assistant Professor of Business Administration
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