Hanna Halaburda, Mikolaj Jan Piskorski, Jul 27, 2010
Existing economic wisdom offers unequivocal advice to managers seeking to establish new platform businesses: Invest to acquire users as quickly as possible and make sure that they have unrestricted access to each other. Since the value of participating in a platform often depends on the number of choices offered, a platform offering unrestricted access should quickly displace a platform that restricts choice. After all, Facebook would not stay around for very long if it amassed a large number of users, but would then only let them interact with a small number of others. It would be equally counterproductive for a game console to build a large user base, and ensure that a large selection of games exists, only to announce that every user can choose at most five games. In both cases, a less restrictive platform would quickly eclipse the one limiting choice.
However, in some markets we observe that unrestricted-choice platforms do not win over restricted-choice ones. If anything, platforms restricting choice perform better in that they are able to charge higher prices than the unrestricted-choice platforms. This is very salient, for example, in the on-line dating market, where most sites give its members unrestricted access to all members. However, some sites, such as eHarmony, give its members no more than 7 potential dating candidates at a time. And despite offering limited choice, eHarmony charges up to a 25 percent