Platform Oligopoly with Endogenous Homing: Implications for Mergers and Free Entry

Abstract

Consumer multi-homing is critical for competition policy regarding digital platforms. To assess the role of multi-homing, we embed endogenous homing into a model of oligopolistic competition between two-sided platforms and apply it to mergers and free entry. We find that the required merger-specific cost reduction is larger if consumers benefit more from multi-homing and that the equilibrium level of platform entry can be insufficient in the presence of consumer multi-homing. These results contrast the belief that multi-homing mitigates the need for stricter policy. We also show that reductions to sellers’ benefit from multi-homing reduces entry (is an effective entry barrier).

Keywords: Two-sided markets, Indirect network externalities, Multi-homing, Platform mergers, Platform entry

JEL Classification: D40, L10, L20, L40