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Observability of Incentive Contract and Platform Competition

Lei Bao, Yulin Zhang and Vitor Miguel Ribeiro

Australian Economic Papers, 2018, vol. 57, issue 2, 154-180

Abstract: As in traditional firms, owners of platforms may hire managers to reduce the marginal production cost. The managers’ contracts may be either observable or unobservable by rival platforms. This paper analyses the impact of contract observability in a two†sided market composed of symmetric indirect externalities with quantity competition and perfect information on agents’ effort. We show that, in both types of contracts, managers’ effort and platform subscription on each side of the market increase as the indirect network externality becomes more intense. However, the impact of the indirect network externality on platform profit is ambiguous. Managerial incentives, consumer surplus and social welfare are higher with observable contracts; however, platform profit is higher with unobservable contracts. Our analysis demonstrates that the disclosure of incentive information in two†sided markets implies tougher competition which unambiguously increases social welfare.

Date: 2018
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