Platform competition under asymmetric information
By: Hanna Halaburda, Yaron Yehezkel
Contributors: Yeḥezḳel, Yaron; Harvard Business School
Edition: Rev.
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: 54
Description: In the context of platform competition in a two-sided market, we study how ex-ante uncertainty and ex-post asymmetric information concerning the value 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 platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which result in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market.
Notes: "February 2011, revised June 2011" -- Publisher's website.

"First version: January 30, 2011. This version: June 24, 2011" -- added t.p.

Includes bibliographical references.