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Platform Competition under Asymmetric Information

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Abstract

In 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 Info

Paper provided by NET Institute in its series Working Papers with number 11-05.

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Length: 54 pages
Date of creation: Sep 2011
Date of revision: Sep 2011
Handle: RePEc:net:wpaper:1105

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

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Keywords: asymmetric information; platform competition; exclusive dealing; technology adoption;

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  1. Casadesus-Masanell, Ramon & Ruiz-Aliseda, Francisco, 2009. "Platform competition, compatibility, and social efficiency," IESE Research Papers D/798, IESE Business School.
  2. Damiano, Ettore & Li, Hao, 2005. "Competing Matchmaking," Microeconomics.ca working papers damiano-05-01-25-10-08-07, Vancouver School of Economics, revised 18 Oct 2005.
  3. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  4. 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.
  5. Andrei Hagiu & Robin S. Lee, 2011. "Exclusivity and Control," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 679-708, 09.
  6. 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.
  7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  8. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
  9. 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.
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Cited by:
  1. Hanna Halaburda & Yaron Yehezkel, 2012. "The Role of Coordination Bias in Platform Competition," Working Papers 12-03, NET Institute, revised Sep 2012.
  2. Sagit Bar-Gill, 2013. "Game of Platforms: Strategic Expansion in Two-Sided Markets," Working Papers 13-12, NET Institute.
  3. Andrei Hagiu & Hanna Halaburda, 2013. "Information and Two-Sided Platform Profits," Harvard Business School Working Papers 12-045, Harvard Business School, revised Apr 2014.
  4. Jullien, Bruno & Pavan, Alessandro, 2013. "Platform Pricing under Dispersed Information," TSE Working Papers 13-429, Toulouse School of Economics (TSE).

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