Ecosystem Competition and Cross-Market Subsidization: A Dynamic Theory of Platform Pricing

TL;DR

This paper develops a dynamic theory explaining why dominant Chinese platform firms sustain perpetual below-cost pricing through ecosystem-based subsidies, highlighting welfare implications and policy considerations.

Contribution

It introduces a novel dynamic game model where ecosystem complementarity drives persistent subsidization, challenging traditional views on monopoly pricing and predation.

Findings

Perpetual below-cost pricing can be stable due to ecosystem spillovers.

Welfare losses increase over time with subsidy wars.

Antitrust should target cross-market capital flows, not just prices.

Abstract

Platform giants in China have operated with persistently compressed margins in highly concentrated markets for much of the past decade, despite market shares exceeding 60\% in core segments. Standard theory predicts otherwise: either the weaker firm exits, or survivors raise prices to monopoly levels. We argue the puzzle dissolves once firms are viewed as ecosystem optimizers rather than single-market profit maximizers. We develop a dynamic game in which a firm's willingness to subsidize depends on the spillover value its users generate in adjacent markets -- what we call \textit{ecosystem complementarity}. When this complementarity is strong enough, perpetual below-cost pricing emerges as the unique stable equilibrium. The result is not predation in the classical sense; there is no recoupment phase. It is a permanent state of subsidized competition, rational for each firm individually but potentially inefficient in aggregate. We characterize the equilibrium, establish its dynamic stability, and show that welfare losses compound over time as capital flows into subsidy wars rather than innovation. The model's predictions are consistent with observed patterns in Chinese platform markets and suggest that effective antitrust intervention should target cross-market capital flows rather than prices.