The Gang of Four: Acquaintances, Friends or Foes? Towards an Integrated Perspective on Platform Competition

Abstract

The economics literature extensively focused on pricing and openness as key strategic choices of platforms in two-sided markets, with the ultimate goal to obtain network effects and win over direct competitors within the boundaries of a single market. We argue that, due to the business model innovations, such as platform envelopment, the platform competition today grows beyond the boundaries of a single market. To theoretically derive the competition implications of these business model innovations, we use the lens of the multi-market contact theory. Our study argues that platform competition unfolds in two distinct, though interdependent stages. At first, platform owners make business model choices aimed at attainment of network effects and enhanced user experience within a single market. At the second stage, platforms expand from their core by enveloping into neighboring platform markets, seeking to further enhance user-experience through cross-platform complementarities. Platform envelopment is likely to coincide or lead to envelopment by the platform firm in the neighboring market; these parallel envelopments lead to convergence of neighboring markets and emergence of supra-platform market, where diverse platform players co-habitate: compete, collaborate and engage in business model innovation.

Keywords: platforms, two-sided markets, competition, business models

JEL Classification: O32