26 Oct 2010Working Paper Summaries

When Does a Platform Create Value by Limiting Choice?

by Ramon Casadesus-Masanell and Hanna W. Halaburda

Platforms such as video games and smartphones need to attract users, and the best way to do so is to offer more and more applications. Is there ever a point where a platform should limit the variety available? Researchers Ramon Casadesus-Masanell and Hanna Halaburda observe that in many situations users enjoy consuming applications together. When such consumption complementarities are present, users may benefit if the platform limits choice. With fewer applications to choose from, it is easier for users to take full advantage from shared consumption. Key concepts include:

Platforms have traditionally encouraged user adoption by providing as many applications as possible. This works because users value having more choices.
When users prefer both using many applications and using the same applications as other users (multiplayer video games, for example), they face a trade-off. As it turns out, there is the tendency to use too many applications, a situation similar to a Prisoners' Dilemma: everybody would be better off consuming fewer applications but each user individually has the desire to consume more. By limiting the number of applications, the platform prevents users from consuming too many applications.
If there are many applications to choose from, it is less likely that users will purchase the same set. In this case, limiting the number of applications helps the users coordinate on the same set.
To limit choice, the platform has a variety of direct and indirect alternatives including imposition of high prices for developers to access the platform or directly restricting the number of applications available.
The insight to practitioners is that maximizing the number of applications available is not always the best strategy for platforms. Instead, actively managing the number of applications may result in substantial value creation, which could be captured though access fees.

Author 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 (1) 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); (2) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (3) 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 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.