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The Effects of Competition and Entry in Multi-sided Markets

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  • Guofu Tan
  • Junjie Zhou

Abstract

We study price competition and entry of platforms in multi-sided markets. Utilizing the simplicity of the equilibrium pricing formula in our setting with heterogeneity of customers’ membership benefits, we demonstrate that in the presence of externalities, the standard effects of competition can be reversed: as platform competition increases, prices, and platform profits can go up and consumer surplus can go down. We identify economic forces that jointly determine the social inefficiency of the free-entry equilibrium and provide conditions under which free entry is socially excessive as well as an example in which free entry is socially insufficient.

Suggested Citation

  • Guofu Tan & Junjie Zhou, 2021. "The Effects of Competition and Entry in Multi-sided Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(2), pages 1002-1030.
    • Handle: RePEc:oup:restud:v:88:y:2021:i:2:p:1002-1030.
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    File URL: http://hdl.handle.net/10.1093/restud/rdaa036
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