Dog Eat Dog: Measuring Returns to Scale Using a Digital Platform Merger

Abstract

Large digital platforms are economically important and are increasingly the subject of regulatory scrutiny. These platforms may improve welfare if network effects are sufficiently large but they may also harm users if they exercise market power or reduce product variety. We study the merger of the two largest platforms for pet-sitting services and use variation in pre-merger market shares across cities to measure network effects. We find large network effects at the individual platform level. Nonetheless, consumers were not substantially better off with the merged platform than with two separate and competing platforms. Heterogeneity in user preferences and attrition, rather than pricing power, help explain the lack of efficiency gains at the market level.