Divide and Conquer in Two-Sided Markets: A Potential-Game Approach

36 Pages Posted: 19 Dec 2019

See all articles by Lester T. Chan

Lester T. Chan

Boston University - Department of Economics

Date Written: December 3, 2019

Abstract

Strong network effects typically lead to multiple equilibria in two-sided markets. To overcome the methodological challenge of selecting an appropriate equilibrium, this paper shows that many two-sided market models are weighted potential games, and thus potential maximization, a refinement of Nash equilibrium justified by many theoretical and experimental studies, can always select a unique equilibrium. Under potential maximization, platforms often subsidize one side and charge the other, i.e., divide and conquer. The fundamental determinant of which side to subsidize or monetize is cross-side network effects. This divide-and-conquer strategy implies that platforms are often designed to favor the money side much more than the subsidy side.

Keywords: two-sided platforms, potential games, potential maximization, divide and conquer, equilibrium selection, network effects

JEL Classification: D85, L12, L13

Suggested Citation

Chan, Lester T., Divide and Conquer in Two-Sided Markets: A Potential-Game Approach (December 3, 2019). Available at SSRN: https://ssrn.com/abstract=3498394 or http://dx.doi.org/10.2139/ssrn.3498394

Lester T. Chan (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

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