Insulated Platform Competition

56 Pages Posted: 20 Oct 2010 Last revised: 19 Apr 2016

Alexander White

Tsinghua University - School of Economics & Management

E. Glen Weyl

Microsoft Research; Yale University

Date Written: April 18, 2016

Abstract

Does competition promote efficient platform pricing and market structures? We model imperfect platform competition using a new approach, Insulated Equilibrium (IE). Building on the observation that platforms often charge low prices to build a "critical mass", IE assumes platforms use "penetration pricing" to simplify the role of user beliefs. We show that competition’s impact on efficiency depends crucially on heterogeneity in users' valuations for network effects. The standard Flat Pricing approach (FP) cannot tractably incorporate such heterogeneity. We show that IE's sharp, general predictions are economically similar to FP's, when FP is tractable, and we show how the nature of product differentiation determines the welfare consequences of competition in calibrated models of the video game and newspaper industries.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2601836.

Keywords: platform competition, insulating tariffs, Spence distortion, user coordination, penetration pricing, excessive entry

JEL Classification: D21, D43, D85, L13

Suggested Citation

White, Alexander and Weyl, E. Glen, Insulated Platform Competition (April 18, 2016). Available at SSRN: https://ssrn.com/abstract=1694317 or http://dx.doi.org/10.2139/ssrn.1694317

Alexander White (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Mailbox A-44
Weilun Building
Beijing, 100084
China

HOME PAGE: http://alex-white.net

Eric Glen Weyl

Microsoft Research ( email )

641 Avenue of the Americas
7th Floor
New York, NY 10011
United States
(857) 998-4513 (Phone)

HOME PAGE: http://www.glenweyl.com

Yale University ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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