Stanford University

WORKING PAPER

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

Marshall Van Alstyne
Zhou Zhou
Lingling Zhang

June 3, 2021

One of the deepest platform challenges is understanding how users create network value for each other and which investments provide leverage. Is more value created by advertising to attract users, discounting to subsidize users, or investing in architecture to connect and retain users? Having grown a user network, which promotes “winner-take-all” dominance, why do platforms with large user bases fail? To address these challenges, we build a theoretical and empirical model to simultaneously measure within and across period network effects for two-sided markets. This yields three main results. First, we extend the customer lifetime value (CLV) literature to network markets, allowing us to measure how different interventions drive CLV on both sides of two-sided markets. Second, we apply our model to the case of Groupon and empirically estimate the strength of within period and across period attraction. We find significant within period attraction between merchants and consumers that does not persist through time. This offers one explanation for the puzzle that even strong network effects might not yield market dominance. Third, we find that users attract users more strongly in experience than search goods markets, as user input drives CLV more than price does. Together these results provide numerous points of leverage for understanding and boosting CLV in order to increase platform value.

Stanford University