Platform Competition with Free Entry of Sellers
32 Pages Posted: 9 Aug 2021
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: Suggested Citation