ESRC Centre for Economic Learning and Social Evolution
Abstract
We provide a framework for analyzing two-sided markets that allows for different
degrees of product differentiation on each side of the market. When platforms are
viewed as homogenous by sellers but heterogeneous by buyers, we show that “competitive
bottlenecks” arise endogenously. In equilibrium, platforms do not compete directly
for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers
are left with none of the gains from trade. Despite this, it is sellers who choose to
purchase from multiple platforms (multihome). Finally, the role of exclusive contracts
to prevent multihoming is explored
