Platform Competition Under Network Effects : Piggybacking and Optimal Subsidization

A repeated challenge in launching a two-sided market platform is how to ignite the cross-side network effects to jumpstart adoption. This issue is often addressed in the literature by using pricing controls, which frequently reveals an optimal solution structure: subsidizing one side of the platform. Little is known, however, on the role of non-pricing controls and their interactions with pricing controls. In this paper, using a game-theoretic framework, we study piggybacking – recruiting users from external networks – as a new and non-pricing control to launching platforms, in conjunction with pricing controls. We find important strategic interactions between piggybacking and platform pricing. First, benchmarked with the well-studied case of no piggybacking in the literature, we discover that the pricing impacts of piggybacking are non-trivial as it may either intensify or mitigate price competition. Consequently, subsidizing may or may not be optimal, and we contribute to the literature by identifying the conditions in which subsidizing is (not) optimal. Second, piggybacking is a double-edged sword that can result in a prisoner's dilemma for competing platforms. Finally, we show the robustness of these findings to several alternative model assumptions, including a convex cost function, seeded piggybacking, and provider-side piggybacking. Managerial implications for platform practitioners are also discussed