A Note of Caution on Using Hotelling Models in Platform Markets
Düsseldorf Institute for Competition Economics (DICE) Discussion Paper 286
22 Pages Posted: 19 May 2018
Date Written: April 10, 2018
We study a Hotelling framework in which customers first pay a monopoly platform to enter the market before deciding between two competing services on opposite ends of a Hotelling line. This setup is common when modeling competition in Internet content provision. We find that standard taken-for-granted solution methods under full market coverage break down, and that in the unique full-coverage equilibrium, the competing service providers set substantially lower prices. Standard methods and prices are restored by giving service providers the first move.
Keywords: Hotelling Model, First Mover Advantage, Two-Sided Market
JEL Classification: D21, D43, L0
Suggested Citation: Suggested Citation