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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.

Suggested Citation

  • Hanna Halaburda & Yaron Yehezkel, 2011. "Platform Competition under Asymmetric Information," Working Papers 11-05, NET Institute, revised Sep 2011.
  • Handle: RePEc:net:wpaper:1105
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    References listed on IDEAS

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    1. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-1672, September.
    2. 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.
    3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
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    5. Ramon Casadesus-Masanell & Francisco Ruiz-Aliseda, 2008. "Platform Competition, Compatibility, and Social Efficiency," Working Papers 08-32, NET Institute.
    6. repec:hrv:faseco:4589709 is not listed on IDEAS
    7. Andrei Hagiu & Robin S. Lee, 2011. "Exclusivity and Control," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 679-708, September.
    8. 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.
    9. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
    10. 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 514-526, June.
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    Cited by:

    1. Mark J. McCabe & Christopher M. Snyder, 2016. "Open Access as a Crude Solution to a Hold-up Problem in the Two-Sided Market for Academic Journals," NBER Working Papers 22220, National Bureau of Economic Research, Inc.
    2. Sagit Bar-Gill, 2013. "Game of Platforms: Strategic Expansion in Two-Sided Markets," Working Papers 13-12, NET Institute.
    3. Halaburda, Hanna & Jullien, Bruno & Yehezkel, Yaron, 2016. "Dynamic Competition with Network Externalities: Why History Matters," CEPR Discussion Papers 11205, C.E.P.R. Discussion Papers.
    4. Hagiu, Andrei & Hałaburda, Hanna, 2014. "Information and two-sided platform profits," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 25-35.
    5. Gary Biglaiser & Jacques Crémer, 2016. "The Value of Incumbency in Heterogeneous Platforms," CESifo Working Paper Series 5829, CESifo Group Munich.
    6. Biglaiser, Gary & Crémer, Jacques, 2016. "The value of incumbency for heterogeneous platforms," TSE Working Papers 16-630, Toulouse School of Economics (TSE), revised Nov 2016.
    7. Hanna Hałaburda & Yaron Yehezkel, 2016. "The Role of Coordination Bias in Platform Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 274-312, April.
    8. Hagiu, Andrei & Wright, Julian, 2015. "Multi-sided platforms," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 162-174.
    9. Jullien, Bruno & Pavan, Alessandro, 2013. "Platform Pricing under Dispersed Information," IDEI Working Papers 793, Institut d'Économie Industrielle (IDEI), Toulouse.
    10. Jeitschko, Thomas D. & Tremblay, Mark J., 2014. "Homogeneous platform competition with endogenous homing," DICE Discussion Papers 166, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    11. Biglaiser, Gary & Crémer, Jacques, 2016. "The value of incumbency in heterogeneous platforms," CEPR Discussion Papers 11207, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

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

    JEL classification:

    • 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

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