Platform Competition under Asymmetric Information
AbstractIn 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 11-05.
Length: 54 pages
Date of creation: Sep 2011
Date of revision: Sep 2011
Contact details of provider:
Web page: http://www.NETinst.org/
asymmetric information; platform competition; exclusive dealing; technology adoption;
Other versions of this item:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-COM-2011-12-19 (Industrial Competition)
- NEP-CTA-2011-12-19 (Contract Theory & Applications)
- NEP-IND-2011-12-19 (Industrial Organization)
- NEP-NET-2011-12-19 (Network Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrei Hagiu & Robin S. Lee, 2011. "Exclusivity and Control," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 679-708, 09.
- Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
- E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
- Ettore Damiano & Li Hao, 2008.
Journal of the European Economic Association,
MIT Press, vol. 6(4), pages 789-818, 06.
- 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.
- Ambrus, Attila & Argenziano, Rossella, 2009.
"Asymmetric Networks in Two-Sided Markets,"
3204916, Harvard University Department of Economics.
- Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
- Ramon Casadesus-Masanell & Francisco Ruiz-Aliseda, 2008.
"Platform Competition, Compatibility, and Social Efficiency,"
08-32, NET Institute.
- Casadesus-Masanell, Ramon & Ruiz-Aliseda, Francisco, 2009. "Platform competition, compatibility, and social efficiency," IESE Research Papers D/798, IESE Business School.
- repec:hrv:faseco:4589709 is not listed on IDEAS
- Hagiu, Andrei & Hałaburda, Hanna, 2014.
"Information and two-sided platform profits,"
International Journal of Industrial Organization,
Elsevier, vol. 34(C), pages 25-35.
- Sagit Bar-Gill, 2013. "Game of Platforms: Strategic Expansion in Two-Sided Markets," Working Papers 13-12, NET Institute.
- Jullien, Bruno & Pavan, Alessandro, 2013.
"Platform Pricing under Dispersed Information,"
TSE Working Papers
13-429, Toulouse School of Economics (TSE).
- Hanna Halaburda & Yaron Yehezkel, 2012. "The Role of Coordination Bias in Platform Competition," Working Papers 12-03, NET Institute, revised Sep 2012.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides).
If references are entirely missing, you can add them using this form.