Publications
Publications
- 2011
- HBS Working Paper Series
Platform Competition under Asymmetric Information
Abstract
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 level of trade 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 the trade downward. Since a monopoly incumbent would set the welfare-maximizing level of trade, this result indicates that platform competition may lead to a market failure: Competition results in a lower level of trade and lower welfare than a monopoly. We also 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 results in market inefficiency.
Keywords
Information; Technological Innovation; Market Entry and Exit; Two-Sided Platforms; Outcome or Result; Performance Efficiency; Risk and Uncertainty; Competitive Strategy
Citation
Halaburda, Hanna, and Yaron Yehezkel. "Platform Competition under Asymmetric Information." Harvard Business School Working Paper, No. 11-080, February 2011. (Revised June 2011, April 2012.)