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Imperfect Platform Competition: A General Framework

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Abstract

The externalities advertisers receive from newspaper readers and that operating system users receive from software developers are among the leading features of those “platform” industries. However, they are rarely incorporated into applied models of imperfect competition. We argue this omission is due to a basic theoretical indeterminacy created by these externalities and propose the solution concept of Insulated Equilibrium to resolve it. At such equilibrium, each platform’s price on one side of the market adjusts to participation on the other side so as to insulate its own allocation, eliminating both the necessity for consumer coordination and the multiplicity of platform best replies. This allows us to solve a model of oligopoly without the unrealistic restrictions typically imposed for tractability and to demonstrate that the fundamental additional distortion created by consumption externalities is analogous to that identified by Spence (1975)’s analysis of a quality-choosing monopolist.

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  • Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers 10-17, NET Institute, revised Nov 2010.
    • Handle: RePEc:net:wpaper:1017
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    Cited by:

    1. Renato Gomes & Alessandro Pavan, 2013. "Cross-Subsidization and Matching Design," Discussion Papers 1559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Renato Gomes & Alessandro Pavan, 2011. "Price Discrimination in Many-to-Many Matching Markets," Discussion Papers 1540, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Charles Angelucci & Julia Cagé, 2019. "Newspapers in Times of Low Advertising Revenues," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 319-364, August.
    4. Minjae Song, 2013. "Estimating Platform Market Power in Two-Sided Markets with an Application to Magazine Advertising," 2013 Meeting Papers 1264, Society for Economic Dynamics.
    5. Jullien, Bruno, 2010. "Two-Sided B2B Platforms," IDEI Working Papers 652, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2011.
    6. repec:hal:spmain:info:hdl:2441/4edekc99or8n2bu86nu4ua8adl is not listed on IDEAS
    7. Gomes, Renato & Pavan, Alessandro, 2016. "Many-to-many matching and price discrimination," Theoretical Economics, Econometric Society, vol. 11(3), September.
    8. repec:hal:spmain:info:hdl:2441/26t617gatp86qree1dejcpchbr is not listed on IDEAS
    9. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-1672, September.
    10. 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.
    11. Charles Angelucci & Julia Cage & Romain de Nijs, 2013. "Price Discrimination in a Two-Sided Market: Theory and Evidence from the Newspaper Industry," Working Papers 13-13, NET Institute.

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    More about this item

    Keywords

    Two-sided Markets; Multi-sided Platforms; Quality Competition; Oligopoly; Insulated Equilibrium; Antitrust and Mergers in Network Industries;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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