Platform Competition in Two-Sided Markets (original) (raw)

Managing competition on a two-sided platform

Journal of Economics & Management Strategy

On many two-sided platforms, users on one side not only care about user participation and usage levels on the other side, but they also care about participation and usage of fellow users on the same side. Most prominent is the degree of seller competition on a platform catering to buyers and sellers. In this paper, we address how seller competition a¤ects platform pricing, product variety, and the number of platforms that carry trade.

Platform market competition with endogenous side decisions

Journal of Economics & Management Strategy

This paper develops a framework to analyze platform competition in two-sided markets in which agents endogenously decide on which side of a platform to join. We characterize the equilibrium pricing structure and perform a comparative statics analysis on how the distribution of agents' preferences affects the platforms' profits. We also show that the market equilibrium under profit-maximizing platforms leads to the first best social surplus, which illustrates the importance of the price mechanism to induce more balanced participation across the two sides. This framework can be applied to analyze market competition for "rental" or "sharing" platforms. In addition, we extend our analysis to consider an initial investment stage, which makes participants the owner of some durable goods to rent out. K E Y W O R D S endogenous side decisions, indirect network externalities, platform market competition, sharing economy, two-sided markets 1 | INTRODUCTION This paper analyzes platform pricing in two-sided markets in which agents endogenously decide on which side of a platform to join. The existing literature on two-sided markets typically assumes that agents are exogenously preassigned to a particular side of the market and derives the optimal pricing structure (Armstrong, 2006; Caillaud & Jullien, 2003; Rochet & Tirole, 2003, 2006). This would be the case if there are two distinct groups of agents that represent each side, as in the example of nightclubs or dating sites where male and female patrons constitute each side. Credit card markets with merchants and card holders can be another example. However, there are other two-sided markets where an agent can be reasonably assumed to decide which side to participate in, such as eBay, crowdfunding platforms, and many "rental" or "sharing" platforms. In sharing economy platforms, each agent can choose whether to provide services or receive services. In the ride-sharing platform market, for instance, Uber or Lyft users can decide whether to become a driver or a passenger. Airbnb and TaskRabbit are other prominent examples of sharing economy platforms with similar characteristics of endogenous side decisions. In crowdfunding platforms, users can be either on the side of fund-raisers or funders depending on their financial status and investment opportunities. To analyze such markets, we endogenize economic agents' participation decision on which side to join and analyze the optimal pricing scheme for platforms. We

Seller competition on two-sided platforms

2019

Two sided platforms connect two user groups to each other. We study how negative within group externality amongst one user group can affect the profit of a monopoly platform through change in the optimal number of users on both sides. We find that an exogenous increase in seller competition (negative within group externality amongst sellers) leads to more number of buyer and sellers and thus an increase in the platform’s profit. In the case of two competing platform, increased seller competition leads to increase in the profits of each platform with a decrease in subscription charge paid by sellers and an increase in subscription charge of buyers.

Platform Subsidy with Endogenous Network Effects

Social Science Research Network, 2014

This paper examines a monopoly platform's two-sided pricing strategies in a setting with seller competition, which gives rise to not only positive cross-side network effects between buyers and sellers, but also a negative same-side network effect among sellers. We show that platform pricing depends crucially on the characteristics associated with the market as a whole (i.e., the two sides combined) rather than a comparison between the two sides' demand elasticities and/or network effects as suggested by existing studies. Regardless of originating from the buyer side, the seller side or both, changes in a parameter induce the platform to raise the buyer entry fee and lower the seller entry fee if and only if the parameter change directly increases the total surplus of the platform economy.

The Contractual Nature of Two-Sided Platforms: A Research Note

Economic Analysis of Law Review, 2014

The present paper discusses the organizational nature of two-sided platforms. The article departs from the classical case of an industry that presents some intrinsic characteristics which give to it the status of a two-sided market. Specifically, the paper considers that the decision of a firm to operate as a traditional merchant or as a platform is based on a bargaining process between the firm and its suppliers, resulting in an incomplete contract which is supported by a particular combination of price and nonprice instruments. Founded on this approach, this essay addresses some fundamental issues in the economics of hybrid forms in two-sided platforms through the examination of the decision of a supermarket to operate as a conventional retailer or as a platform.

Platform Competition as Network Contestability

arXiv (Cornell University), 2013

Recent research in industrial organisation has investigated the essential place that middlemen have in the networks that make up our global economy. In this paper we attempt to understand how such middlemen compete with each other through a game theoretic analysis using novel techniques from decision-making under ambiguity. We model a purposely abstract and reduced model of one middleman who provides a two-sided platform, mediating surplus-creating interactions between two users. The middleman evaluates uncertain outcomes under positional ambiguity, taking into account the possibility of the emergence of an alternative middleman offering intermediary services to the two users. Surprisingly, we find many situations in which the middleman will purposely extract maximal gains from her position. Only if there is relatively low probability of devastating loss of business under competition, the middleman will adopt a more competitive attitude and extract less from her position.

Platform Competition: Strategic Tradeoffs in Platform Markets

2013

"Because the literature on platform competition emphasizes the role of network effects, it prescribes rapidly expanding a network of platform users and complementary applications to capture entire markets. We challenge the unconditional logic of a winner-take-all (WTA) approach by empirically analyzing the dominant strategies used to build and position platform systems in the U.S. video game industry. We show that when platform firms pursue two popular WTA strategies concurrently and with equal intensity––growing the number and variety of applications while also securing a larger fraction of those applications with exclusivity agreements––it diminishes the benefits of each strategy to the point that lowers platform performance. We also show that a differentiation strategy based on distinctive positioning improves a platform’s performance only when a platform system is highly distinctive relative to its rivals. Our results suggest that platform competition is shaped by important strategic tradeoffs, and that the WTA approach will not be universally successful."

Platform Pricing with Endogenous Network Effects

This paper examines a monopoly platform's two-sided pricing strategy through modeling the trades between the participating sellers and buyers. In this approach, the network effects emerge endogenously through the equilibrium trading strategies of the two sides. We show that platform pricing depends crucially on the characteristics associated with market liquidity, including both sides' entry costs, the buyers' preferences, and the distribution of the sellers' quality. The platform may subsidize sellers if the market is sufficiently liquid, whereas buyer subsidy can be optimal given an illiquid market. We also illustrate the impact of the sellers' quality heterogeneity on the platform's optimal fees and the two sides' entry scales. These findings provide guidance for platform pricing based on specific market and user characteristics, which are directly applicable to managerial decisions and deepen theoretical understanding of two-sided platforms.

Platform Competition in Two-Sided Markets: The Case of Payment Networks

SSRN Electronic Journal, 2000

In this article, we construct a model to study competing payment networks, where networks offer differentiated products in terms of benefits to consumers and merchants. We study market equilibria for a variety of market structures: duopolistic competition and cartel, symmetric and asymmetric networks, and alternative assumptions about multihoming and consumer preferences. We find that competition unambiguously increases consumer and merchant welfare. We extend this analysis to competition among payment networks providing different payment instruments and find similar results.

Old abuses in new markets? Dealing with excessive pricing by a two-sided platform

Journal of Antitrust Enforcement , 2021

Exploitative abuses, especially excessive pricing, have been one of the most debated forms of abuse of dominant position. Unlike exclusionary abuses, they have been prohibited only under certain jurisdictions and on rather rare occasions. In Europe there have been few recent decisions and investigations that have reiterated existing approaches and tests for establishing excessive pricing. The Turkish Competition Authority's Sahibinden.com decision has come at such a time where the discussion on excessive pricing has been somewhat revived. However, this decision stands out as it is the first one where a competition authority has found prices to be excessive and therefore abusive in the context of a two-sided platform. Competition in platform markets display unique dynamics that may be very different from what may be observed in traditional markets especially in terms of pricing strategies. This article aims to demonstrate, through the Turkish Competition Authority's recent decision, the difficulties in applying existing tests and criteria on excessive pricing to a two-sided platform. A thorough analysis of this decision demonstrates that competition enforcement in what may be called 'new' platform markets necessitates new approaches or adjustments of existing ones.