Platform Competition under Asymmetric Information

Hanna Halaburda and Yaron Yehezkel ()
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Yaron Yehezkel: The Recanati Graduate School of Business Administration, Tel Aviv University, http://www.tau.ac.il/~yehezkel

No 11-05, Working Papers from NET Institute

Abstract: In the context of platform competition in a two-sided market, we study how ex-ante uncertainty and ex-post asymmetric information concerning the value of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which result in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market.

Keywords: asymmetric information; platform competition; exclusive dealing; technology adoption (search for similar items in EconPapers)
JEL-codes: L15 L41 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2011-09, Revised 2011-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind and nep-net
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Citations: View citations in EconPapers (5)

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Journal Article: Platform Competition under Asymmetric Information (2013)
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