Platform-Mediated Competition

TL;DR

This paper analyzes how within-group externalities in many-to-many platform matchings influence market structure, competition, and regulation, providing a general model and applications to retail and media markets.

Contribution

It develops a general model of many-to-many matchings with within-group externalities and derives optimal matchings and comparative statics for platform design.

Findings

Optimal matchings depend on within-group externalities.

Vertical integration and mergers affect market welfare.

Platform information structures influence market outcomes.

Abstract

Cross-group externalities and network effects in two-sided platform markets shape market structure and competition policy, and are the subject of extensive study. Less understood are the within-group externalities that arise when the platform designs many-to-many matchings: the value to agent $i$ of matching with agent $j$ may depend on the set of agents with which $j$ is matched. These effects are present in a wide range of settings in which firms compete for individuals' custom or attention. I characterize platform-optimal matchings in a general model of many-to-many matching with within-group externalities. I prove a set of comparative statics results for optimal matchings, and show how these can be used to analyze the welfare effects various changes, including vertical integration by the platform, horizontal mergers between firms on one side of the market, and changes in the platform's information structure. I then explore market structure and regulation in two in-depth applications. The first is monopolistic competition between firms on a retail platform such as Amazon. The second is a multi-channel video program distributor (MVPD) negotiating transfer fees with television channels and bundling these to sell to individuals.