Platform Competition Under Asymmetric Information

Abstract

In the context of platform competition in a two-sided market, we study how exante 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.

The Role of Coordination Bias in Platform Competition

“…This result differs from Hagiu () that shows that an incumbent platform which benefits from a full coordination bias advantage (corresponding to platform A in our model) does not distort its level of trade while the competing entrant (corresponding to platform D ) distorts the level of trade downward. These results also differ from Halaburda and Yehezkel () which show that both platforms distort the level of trade downward regardless of whether they attract the buyer of the seller. For business strategy, Lemmas and show that a platform's business model also indicates whether a platform should “oversupply” or “undersupply” applications.…”

“…They show that the expectations of the two sides concerning market participation in the platform affects the strategic use of first‐party content. Halaburda and Yehezkel () consider undifferentiated competition where the two sides of the market are ex ante uninformed about their utilities, and are ex post privately informed. A common feature in the above literature is the assumption that one platform fully benefits from a belief advantage.…”

Dynamic competition with network externalities: how history matters

“…Caillaud and Jullien (2001, 2003) introduce the notion of favorable beliefs—with respect to networks in the context of two‐sided markets—as a tool that can be used to characterize the full equilibrium set for competition between undifferentiated platforms. This concept was used in subsequent research on two‐sided markets (see Hagiu, 2006; Jullien, 2011; Halaburda and Yehezkel, 2013) as a way of modelling market leadership when one platform benefits from favorable expectations; it has also been used in the literature on telecommunications to model consumer inertia (Lopez and Rey, 2016). Though all of these articles acknowledge the dynamic nature of platform competition, their aim is to approximate market characteristics using static models.…”

Open Access as a Crude Solution to a Hold‐Up Problem in the Two‐Sided Market for Academic Journals

“…See Rochet and Tirole [] for references to the literature prior to their paper. More recent work on two‐sided markets includes Ambrus and Argenziano [], Halaburda and Yehezkel [], and Jullien [], in addition to the other papers referenced in this section. Much of the applied work on two‐sided markets, our paper included, builds on the foundation laid by the general analyses in Armstrong [] and Rochet and Tirole []. In addition to a wealth of other cases, these seminal articles provide a thorough analysis of the case relevant to our setting, that of singlehoming on one side of the market and multihoming on the other side—with academic journals, authors can submit a single article only to one journal (singlehoming) while readers can subscribe to multiple journals simultaneously (multihoming).…”

“…See Rochet and Tirole [] for references to the literature prior to their paper. More recent work on two‐sided markets includes Ambrus and Argenziano [], Halaburda and Yehezkel [], and Jullien [], in addition to the other papers referenced in this section.…”