Platform Competition with Endogenous Homing

Abstract

We consider two-sided markets in which consumers and firms endogenously determine whether they single-home (patronize only one platform), or multi-home (join competing platforms). We find that the standard competitive bottleneck allocation in which all consumers single-home and all firms multi-home is always an equilibrium. In addition, we find allocations with a mix of multi-homing and single-homing on both sides of the market (akin to game consoles, ride- and home-sharing services, and video streaming platforms). However, unlike the standard pricing result where the side that multi-homes faces higher prices, we find that lower prices coincide with multi-homing: agents find multi-homing more attractive when faced with lower prices. We also show that endogenous homing induces a new platform pricing strategy, straddle pricing, which deters price undercutting between platforms.

Keywords: two-sided markets, platforms, platform competition, multi-homing, single-homing, endogenous homing decisions, network effects, smartphones, video games and game consoles, rideshare services

JEL Classification: L14, L22, D40, L13