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Insulated Platform Competition

Alexander White

Tsinghua University - School of Economics & Management

E. Glen Weyl

Microsoft Research New England; University of Chicago

May 19, 2012

NET Institute Working Paper No. 10-17

The externalities advertisers receive from newspaper readers and that operating system users receive from software developers are among the leading features of those industries. However, such externalities create indeterminacies in both supply and demand that have rendered intractable the analysis of rich, policy-relevant models that take these features into account. In this paper, we propose a static solution concept for platform competition, Insulated Equilibrium (IE), that resolves these indeterminacies.

Under IE, firms charge prices that are low when they have fewer than their targeted number of consumers, solving consumer coordination problems and leading to intuitive predictions of platforms' prices. We show that consumption externalities create a distortion that is analogous to the one arising in Spence’s (1975) model of a quality-choosing monopolist. Furthermore, the effect that competition has on this distortion depends on whether platforms are primarily differentiated by the degree of externalities they generate or along some other dimension.

Number of Pages in PDF File: 38

Keywords: Two-Sided Markets, Multi-Sided Platforms, Oligopoly, Insulated Equilibrium, Antitrust and Mergers in Network Industries

JEL Classification: D21, D43, D85, L13

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Date posted: October 20, 2010 ; Last revised: September 7, 2014

Suggested Citation

White, Alexander and Weyl, E. Glen, Insulated Platform Competition (May 19, 2012). NET Institute Working Paper No. 10-17. Available at SSRN: http://ssrn.com/abstract=1694317 or http://dx.doi.org/10.2139/ssrn.1694317

Contact Information

Alexander White (Contact Author)
Tsinghua University - School of Economics & Management ( email )
Mailbox A-44
Weilun Building
Beijing, 100084
HOME PAGE: http://alex-white.net
Eric Glen Weyl
Microsoft Research New England ( email )
One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
1126 East 59th Street
Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
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