The authors present a tractable model of platform competition in a general equilibrium setting, allowing multiple platforms to emerge. The authors endogenize the size, number and type of each platform, allowing for different utility functions, different endowments for varying types of agents, and different capital costs.
Contrary to the prior literature, both the macro-financial literature on network architecture and the partial equilibrium industrial organization of two sided markets, our economy is efficient. Platforms internalize the network effects of adding more and different types of users by offering bundles which state both the number and composition of users. The authors use a Walrasian equilibrium concept and allow the price of joining a platform to depend not only on the characteristics of the platform, but the identified type of user.
The sum of fees paid for a given active platform will cover its costs. With this extended commodity space and bundling, the first and second welfare theorems apply. The authors model suggests how the equilibrium characterization of two-sided markets changes when we alter the cost structure, as if there is technological innovation which reduces costs, or alter the level and distribution of wealth in the economy, so we can examine the positive implications and the equity/distributional issues.
The authors argue against distortions created through fees, debates on the allocations of costs and the presumption that platforms with externalities have to be regulated. In the concluding section we also highlight the limitations of our analysis.
This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme
Jain, A.K., Townsend R. The Economics of Platforms in a Walrasian Framework. (2015) 38 p