Imperfect Platform Competition: A General Framework

Abstract

Perhaps the longest-standing problem in the theory of two-sided markets is developing a general model of competition. We extend the monopoly techniques of Weyl (forthcoming) to develop a solution concept, Insulated Equilibrium, that makes such a model tractable. In Insulated Equilibrium each firm’s price adjusts to all firms’ participation on the other side of the market so as to insulate its own allocation. This eliminates both the indeterminacy of consumer reactions once platforms have set their tariffs and the multiplicity of reaction functions that platforms can have to one anothers tariffs. The tractability of our solution concept obviates the need for restrictive assumptions.