Insulated Platform Competition
Tsinghua University - School of Economics & Management
E. Glen Weyl
Microsoft Research New England; University of Chicago
May 5, 2015
NET Institute Working Paper No. 10-17
Platforms often charge low prices until they have built up a "critical mass" to smooth user coordination. Such "insulating tariffs" dampen the ability of one platform to undermine another's market position through aggressive competition, thereby increasing equilibrium profits and excessive entry. We propose a general static model incorporating such realistic pricing and show how it improves the tractability of platforms' optimization problems, allowing us to analyze richer user heterogeneity. We illustrate this by characterizing the impact of competition on the social efficiency of network effect provision in stylized but calibrated models of the US video game and newspaper industries.
The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2601836
Number of Pages in PDF File: 51
Keywords: Two-Sided Markets, Platform Competition, Insulating Tariffs, Spence Distortion, Excessive Entry, User Coordination, Dominant Strategy Implementation
JEL Classification: D21, D43, D85, L13
Date posted: October 20, 2010 ; Last revised: May 15, 2015
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