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Information and Two-Sided Platform Profits

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  • Andrei Hagiu

    ()
    (Harvard Business School, Strategy Unit)

  • Hanna Halaburda

    ()
    (Bank of Canada)

Abstract

We study the effect of different levels of information on two-sided platform profits| under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because higher responsiveness leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 12-045.

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Length: 31 pages
Date of creation: Nov 2013
Date of revision: Apr 2014
Handle: RePEc:hbs:wpaper:12-045

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Keywords: two-sided platforms; information; responsive expectations; passive expectations; wary expectations;

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References

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  1. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  2. Hanna Halaburda & Yaron Yehezkel, 2013. "Platform Competition under Asymmetric Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 22-68, August.
  3. Rossella Argenziano, 2007. "Differentiated Networks: Equilibrium and Efficiency," Economics Discussion Papers 638, University of Essex, Department of Economics.
  4. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Patrick Rey & Thibaud Verg�, 2004. "Bilateral Control with Vertical Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 728-746, Winter.
  6. Andrei Hagiu, 2009. "Two-Sided Platforms: Product Variety and Pricing Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1011-1043, December.
  7. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  8. Attila Ambrus & Rossella Argenziano, 2009. "Asymmetric Networks in Two-Sided Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 17-52, February.
  9. repec:hrv:faseco:4589709 is not listed on IDEAS
  10. Evans David S. & Schmalensee Richard, 2010. "Failure to Launch: Critical Mass in Platform Businesses," Review of Network Economics, De Gruyter, vol. 9(4), pages 1-28, December.
  11. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
  12. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  13. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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