Vertically Disintegrated Platforms

35 Pages Posted: 10 Jan 2020 Last revised: 20 Feb 2020

See all articles by Christoph Aymanns

Christoph Aymanns

London School of Economics & Political Science (LSE) - London School of Economics; University of St. Gallen - School of Finance

Mathias Dewatripont

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)

Tarik Roukny

Massachusetts Institute of Technology (MIT); KU Leuven - Faculty of Business and Economics (FEB)

Date Written: December 20, 2019

Abstract

Understanding the implications of digital platform strategies on user welfare has become a crucial issue for policy makers and economists alike. In payments, distributed ledger technologies such as the blockchain have introduced new models of platform governance in the form of vertically disintegrated platforms (VDP). In this paper, we develop a framework to study the implications of vertical disintegration on user welfare. A VDP mediates between users and processors that enable interactions between users. The VDP controls the price structure but the price level is set in a competitive equilibrium between processors; proceeds from operating the platform service are split between processors and the VDP. We find that the welfare ordering between traditional (integrated) and disintegrated platforms crucially depends on the platform cost structure and the regulatory conditions in the market for processors. When the cost of integrating processors depends on the transaction volume, the VDP can produce higher welfare. In contrast, when this cost is fixed, an unregulated VDP is less desirable than the integrated platform. However, regulatory limits on the VDP power over processors can make user welfare under a VDP dominate. Within our framework, we analyze recent applications in the payment industry, including central bank digital currencies, and show how different design choices affect user welfare.

Keywords: digital economy, multi-sided platform, payment system, distributed ledger technology, blockchain, central bank digital currency

Suggested Citation

Aymanns, Christoph and Dewatripont, Mathias and Roukny, Tarik, Vertically Disintegrated Platforms (December 20, 2019). Available at SSRN: https://ssrn.com/abstract=3507355 or http://dx.doi.org/10.2139/ssrn.3507355

Christoph Aymanns

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

University of St. Gallen - School of Finance

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Mathias Dewatripont

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4217/4 (Phone)
+32 2 650 4475 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tarik Roukny (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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