Monday, November 8, 2010
Posted by D. Daniel Sokol
Alexander White (Department of Economics, Harvard University) and E. Glen Weyl (Harvard University Society of Fellows; Toulouse School of Economics) discuss Imperfect Platform Competition: A General Framework.
ABSTRACT: We propose a general model of imperfect competition among multi-product firms, the consumption of whose goods yields externalities from one consumer to another. We extend the allocation approach of the Weyl (2010) monopoly model, proposing a solution concept, Insulated Equilibrium, that allows for tractable analysis of competition. In such an equilibrium each firm’s price on one side of the market adjusts to all firms’ participation levels on the other side, 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 another’s tariffs. Our approach allows us to derive intuitive first-order conditions characterizing equilibrium without restrictive assumptions and to analyze the effects of competition, mergers and regulation.