Borrowing from a Bigtech Platform

Abstract

We model competition in the credit market between banks and a bigtech platform which offers a marketplace for merchants. We show that, unlike banks, the platform lends to merchants based on their revenues and network externalities. To enforce partial loan repayment, the platform increases borrowers' transaction fees. Credit markets become partially segmented, with the platform targeting borrowers of low and medium credit quality. The platform benefits from advantageous selection at the expense of banks, reducing equilibrium welfare for intermediate-credit-quality merchants. When revenues, network externalities, or advantagenous-selection rents are large, the platform does not value superior information about credit quality.

Keywords: Bigtech, platform, advantageous selection, welfare, credit rationing

JEL Classification: G21, G23, C72, D82