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Imperfect Platform Competition: A General Framework

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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.

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File URL: http://www.netinst.org/White_Weyl_10-17.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 10-17.

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Length: 41 pages
Date of creation: Sep 2010
Date of revision: Nov 2010
Handle: RePEc:net:wpaper:1017

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Web page: http://www.NETinst.org/

Related research

Keywords: Two-sided Markets; Multi-sided Platforms; Quality Competition; Oligopoly; Insulated Equilibrium; Antitrust and Mergers in Network Industries;

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References

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  1. Ulrich Doraszelski & Joe Harrington & Jiawei Chen, 2009. "Avoiding Market Dominance: Product Compatibility in Markets with Network Effects," 2009 Meeting Papers 30, Society for Economic Dynamics.
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  12. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, vol. 97(3), pages 713-744, June.
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Citations

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Cited by:
  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. Jullien, Bruno, 2010. "Two-Sided B2B Platforms," TSE Working Papers 11-223, Toulouse School of Economics (TSE), revised Mar 2011.
  3. Charles Angelucci & Julia Cage & Romain de Nijs, 2013. "Price Discrimination in a Two-Sided Market: Theory and Evidence from the Newspaper Industry," Working Papers 13-13, NET Institute.
  4. Bruno Jullien, 2011. "Competition in Multi-sided Markets: Divide and Conquer," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 186-220, November.
  5. Renato Gomes & Alessandro Pavan, 2011. "Price Discrimination in Many-to-Many Matching Markets," Discussion Papers 1540, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Renato Gomes & Alessandro Pavan, 2013. "Cross-Subsidization and Matching Design," Discussion Papers 1559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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