Author(s)
E. Glen Weyl and Alexander White
Source
NET Institute Working Paper #10-17, 2012
Summary
This paper presents a flexible, general model for competition in markets featuring multi-sided platforms.
Policy Relevance
Regulators can use this model to better understand pricing strategies of firms competing in markets with two-sided platforms.
Main Points
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Many Internet industries feature two-sided platforms, where a firm sells different products to different consumer groups. For example, Google sells ad space to advertisers while providing a free search engine, email, and other tools to consumers at no cost.
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In these markets, there will often be consumption externalities where the amount of consumption on one side of the platform affects the desirability of consumption on one or both sides of the platform. For example, Google ads are more desirable if more people use Google for searching; social networks like Facebook are more appealing to consumers if many of their friends have already signed up.
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It is very difficult to develop mathematical models of markets when firms compete for customers on both sides of a platform.
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It is hard to determine how competing platforms and consumers on two market sides will interact; with older models there are often multiple possible outcomes in any given market and it’s not obvious which one is correct. This is a major problem because such models make no useful predictions.
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The authors solve this problem by noting that firms set prices for their products that “coordinate” consumer behavior, and a single outcome can be obtained.
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The model proposed by the authors could be extended in many ways: for example, it can be used to examine not just two-sided markets, but markets with three, four, or more sides.
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This is a very technical paper that may not be of general interest.