Platform Competition under Asymmetric Information

Abstract

In the context of platform competition in a two-sided market, we study how exante uncertainty and ex-post asymmetric information concerning the value of a new technology aects the strategies of the platforms and the market outcome. We nd that the incumbent dominates the market by setting the welfare-maximizing quantity when the dierence in the degree of asymmetric information between buyers and sellers is signicant. However, if this dierence 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 nd 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 ineciency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market.