Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts

Abstract

We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that competitive bottlenecks arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers that choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.

Keywords: Two sided markets, platform competition, multihoming, exclusive dealing

JEL Classification: D43, L12, L13