Platform Competition with Free Entry of Sellers

32 Pages Posted: 9 Aug 2021

See all articles by Federico Etro

Federico Etro

Florence School of Economics and Management

Date Written: August 10, 2021

Abstract

We study platforms competing in commissions on revenues of sellers engaged in monopolistic competition, as the app providers on the app stores of iPhones and Android devices. Free entry of sellers on each platform generates multihoming superstars and a long tail of singlehoming sellers. Competition to attract buyers and sellers induces the platforms to set the commission rates at the optimal level for consumers and redistribute all the revenues through lower access prices or higher quality of the platforms. The commissions are lower when the pass-through on prices is higher, sellers's demand (surplus) is more (less) elastic to prices, and when sellers's entry is more reactive to profitability. We discuss the role of heterogeneous sellers, substitutability between sellers's products, direct channels for sellers and consumer myopia. We also unveil a channel through which hybrid platforms can benefit consumers by introducing own products and reducing commissions to attract new sellers and customers. The results are in contrast with the idea that device-funded platforms would harm consumers in the long run through excessive commissions or self-preferencing aimed at foreclosure.

Keywords: Digital platforms, Third-party Sellers, Hybrid marketplaces, Commissions, Entry

JEL Classification: L1, L4

Suggested Citation

Etro, Federico, Platform Competition with Free Entry of Sellers (August 10, 2021). Available at SSRN: https://ssrn.com/abstract=3901080 or http://dx.doi.org/10.2139/ssrn.3901080

Federico Etro (Contact Author)

Florence School of Economics and Management ( email )

Via delle Pandette 32
Firenze, Tuscany 30123
Italy

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