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.
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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
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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)
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