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Towards a theory of platform dynamics

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  • Luís Cabral

Abstract

I introduce a dynamic framework to analyze platforms. The (single) platform owner sets prices at the beginning of each period. Agents (buyers, sellers, readers, consumers, merchants, etc.) make platform membership decisions occasionally. I show that an optimal platform pricing addresses two externalities: across sides and across time periods. This results in optimal prices which depend on platform size in a nontrivial way. By means of numerical simulations, I examine the determinants of equilibrium platform size, showing that the stationary distribution of platform size may be bimodal, that is, with some probability the platform remains very low or takes very long to increase in size. I also contrast the dynamics of proprietary versus nonproprietary (i.e., zero‐priced) platforms, and consider the specific case of asymmetric platforms (one side cares about the other but not vice versa).

Suggested Citation

  • Luís Cabral, 2019. "Towards a theory of platform dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(1), pages 60-72, January.
    • Handle: RePEc:bla:jemstr:v:28:y:2019:i:1:p:60-72
    DOI: 10.1111/jems.12312
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    References listed on IDEAS

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    1. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    2. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 83-111.
    3. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    4. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-1140, September.
    5. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
    6. Martin Peitz & Sven Rady & Piers Trepper, 2017. "Experimentation in Two-Sided Markets," Journal of the European Economic Association, European Economic Association, vol. 15(1), pages 128-172.
    7. André Veiga & E. Glen Weyl & Alexander White, 2017. "Multidimensional Platform Design," American Economic Review, American Economic Association, vol. 107(5), pages 191-195, May.
    8. Christopher Budd & Christopher Harris & John Vickers, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 543-573.
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    Cited by:

    1. Belleflamme, Paul & Peitz, Martin, 2019. "Price disclosure by two-sided platforms," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    2. Geng, Yang & Zhang, Yulin, 2020. "Platform launch in two-sided markets and users’ expectations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 558(C).
    3. Cenamor, Javier, 2021. "Complementor competitive advantage: A framework for strategic decisions," Journal of Business Research, Elsevier, vol. 122(C), pages 335-343.
    4. Jacques Crémer & Gary Biglaiser & André Veiga, 2022. "Should I stay or should I go? Migrating away from an incumbent platform," Post-Print hal-03792918, HAL.
    5. Crémer, Jacques & Biglaiser, Gary & Veiga, André, 2022. "Should I stay or should I go? Migrating away from an incumbent platform," TSE Working Papers 21-1281, Toulouse School of Economics (TSE).
    6. Anciaes, Paulo & Metcalfe, Paul & Heywood, Chris & Sheldon, Rob, 2019. "The impact of fare complexity on rail demand," Transportation Research Part A: Policy and Practice, Elsevier, vol. 120(C), pages 224-238.

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