Competing by Restricting Choice: The Case of Search Platforms

We show that a two-sided platform can successfully compete by limiting the choice of po-tential matches it offers to its customers while charging higher prices than platforms with unre-stricted choice. Starting from micro-foundations, we find that increasing the number of potential matches not only has a positive effect due to larger choice, but also a negative effect due to com-petition between agents on the same side. Agents with heterogeneous outside options resolve the trade-off between the two effects differently. For agents with a lower outside option, the compet-itive effect is stronger than the choice effect. Hence, these agents have higher willingness to pay for a platform restricting choice. Agents with a higher outside option prefer a platform offering unrestricted choice. Therefore, the two platforms may coexist without the market tipping. Our model may help explain why platforms with different business models coexist in markets using the stylized model of online dating