Platform Money

This paper examines how a platform's ability to create its own money affects its pricing decisions, the search and matching dynamics between buyers and sellers, and overall economic welfare. We show that by pricing in its own currency, the platform can extract seignorage from buyers while imposing higher fees on sellers. In contrast, the legacy market uses fiat money, cannot recoup seignorage from buyers and thus operates at a competitive disadvantage, even when inflation costs are less salient compared to direct fees. In environments where the platform's technology is identical with that of the legacy market, the resulting market tightness on the platform is lower than socially optimal. However, when the platform's technology is superior, the introduction of platform money moves the equilibrium outcome closer to the social optimum than a fee-only platform, primarily because it is more cost-effective in attracting buyers.