Abstract

http://ssrn.com/abstract=1758831
 
 

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Platform Competition Under Asymmetric Information


Hanna Halaburda


Bank of Canada

Yaron Yehezkel


Tel Aviv University - Eitan Berglas School of Economics

February 7, 2011

Harvard Business School Strategy Unit Working Paper No. 11-080

Abstract:     
In the context of platform competition in a two-sided market, we study how uncertainty and asymmetric information concerning the success 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 in a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, the model provides a compelling argument why it is usually entrants, not incumbents, that bring major technological innovations to the market. Second, we consider multi-homing. We find that the incumbent dominates the market and earns higher profit under multi-homing than under single-homing. Multi-homing solves the market failure resulting from asymmetric information in that the incumbent can motivate the two sides to trade for the first-best quantity even if the difference in the degree of asymmetric information between the two sides is narrow.

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Date posted: February 10, 2011  

Suggested Citation

Halaburda, Hanna and Yehezkel, Yaron, Platform Competition Under Asymmetric Information (February 7, 2011). Harvard Business School Strategy Unit Working Paper No. 11-080. Available at SSRN: http://ssrn.com/abstract=1758831 or http://dx.doi.org/10.2139/ssrn.1758831

Contact Information

Hanna Halaburda (Contact Author)
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
Yaron Yehezkel
Tel Aviv University - Eitan Berglas School of Economics ( email )
P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9908 (Fax)
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