Platform competition under asymmetric information
By: Hanna Hałaburda, Yaron Yehezkel
Contributors: Yeḥezḳel, Yaron; Harvard Business School
Series: Working paper / Harvard Business School -- 11-080; Working paper (Harvard Business School) -- 11-080.
Publisher: Harvard Business School
Published: 2011
Place of publication: [Boston]
Language: eng
Number of pages: 48
Description: In the context of platform competition in a two-sided market, we study how uncertainty and asymmetric information concerning the success of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent plat- form will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead in a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, the model provides a compelling argument why it is usually entrants, not incumbents, that bring major technological innovations to the market. Second, we consider multi-homing. We find that the incumbent dominates the market and earns higher profit under multi-homing than under single-homing. Multi-homing solves the market failure resulting from asymmetric information in that the incumbent can motivate the two sides to trade for the first-best quantity even if the difference in the degree of asymmetric information between the two sides is narrow.
Notes: "February 2011"--Publisher's website.

Includes bibliographical references.