Working Paper | HBS Working Paper Series | 2011

Quantity vs. Quality: Exclusion by Platforms with Network Effects

by Andrei Hagiu

Abstract

This paper provides a simple model of platforms with direct network effects, in which users value not just the quantity (i.e., number) of other users who join, but also their average quality in some dimension. A monopoly platform is more likely to exclude low-quality users when users place more value on average quality and less value on total quantity. With competing platforms, the effect of user preferences for quantity is reversed. Furthermore, exclusion incentives depend in a non-trivial way on the proportion of high-quality users in the overall population and on their opportunity cost of joining the platform relative to low-quality users. The net effect of these two parameters depends on whether they have a stronger impact on the gains from exclusion (higher average quality) or on its costs (lower quantity).

Keywords: multi-sided platforms; Network Effects; exclusion; quality and quantity; Cost; Governing Rules, Regulations, and Reforms; Network Effects; Market Participation; Market Platforms; Monopoly; Quality; Motivation and Incentives; Strategy;

Citation:

Hagiu, Andrei. "Quantity vs. Quality: Exclusion by Platforms with Network Effects." Harvard Business School Working Paper, No. 11-125, May 2011.