Location Decisions of Competing Platforms

Abstract

There are examples of entry in two-sided markets, where first entrants occupy a 'central location' and serve agents with 'intermediate tastes', while later entrants are niche players. Why would the first entrant choose to become a 'general' platform, given that later entrants will not have enough room for differentiation, resulting in an intense price competition? This one-sided market logic may not apply in a two-sided market. A key difference in a two-sided market, stemming from the presence of cross-group network externalities, is stronger demand creation. We develop a model which can deliver the above mentioned empirical observation, when the network externalities are intermediate. On the other hand, when externalities are low, our model predicts that differentiation will be maximum, as it would be in a one-sided market. Finally, for strong externalities only one platform is active and locates at the center.