Imperfect Platform Competition: A General Framework

Alexander White () and Eric Weyl ()

No 10-17, Working Papers from NET Institute

Abstract: The externalities advertisers receive from newspaper readers and that operating system users receive from software developers are among the leading features of those “platform” industries. However, they are rarely incorporated into applied models of imperfect competition. We argue this omission is due to a basic theoretical indeterminacy created by these externalities and propose the solution concept of Insulated Equilibrium to resolve it. At such equilibrium, each platform’s price on one side of the market adjusts to participation on the other side so as to insulate its own allocation, eliminating both the necessity for consumer coordination and the multiplicity of platform best replies. This allows us to solve a model of oligopoly without the unrealistic restrictions typically imposed for tractability and to demonstrate that the fundamental additional distortion created by consumption externalities is analogous to that identified by Spence (1975)’s analysis of a quality-choosing monopolist.

Keywords: Two-sided Markets; Multi-sided Platforms; Quality Competition; Oligopoly; Insulated Equilibrium; Antitrust and Mergers in Network Industries (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-09, Revised 2010-11
New Economics Papers: this item is included in nep-com, nep-ind, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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