Imperfect Platform Competition: A General Framework
AbstractThe 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.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 10-17.
Length: 41 pages
Date of creation: Sep 2010
Date of revision: Nov 2010
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Web page: http://www.NETinst.org/
Two-sided Markets; Multi-sided Platforms; Quality Competition; Oligopoly; Insulated Equilibrium; Antitrust and Mergers in Network Industries;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-COM-2010-11-06 (Industrial Competition)
- NEP-IND-2010-11-06 (Industrial Organization)
- NEP-NET-2010-11-06 (Network Economics)
- NEP-REG-2010-11-06 (Regulation)
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