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Price-Increasing Competition on Two-Sided Markets with Homogeneous Platforms

Böhme, Enrico and Müller, Christopher (2010): Price-Increasing Competition on Two-Sided Markets with Homogeneous Platforms.

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Abstract

We make a case for price-increasing competition on “competitive bottleneck” two-sided markets. Unlike previous literature on price-increasing competition and two-sided markets, we abstract from product/platform differentiation, structural differences, scale effects, search costs, and capacity constraints, which would per se favor the one or the other market structure. We argue that demand interrelation as given on many competitive bottleneck two- sided markets might be sufficient to cause either no observable price effect of competition or price-increasing competition under certain conditions. We derive these conditions and illustrate the economic intuition. Under price equality, virtually everything except for the number of platform operators is identical in monopoly and duopoly. Nevertheless, total demand on both market sides in the duopoly market exceeds total demand in the monopoly market. Furthermore, even though there is no observable price effect, there is still a competitive effect that becomes manifest in total duopoly equilibrium profits being strictly smaller than monopoly profits. The relationship of total welfare is ambiguous in subsidization cases, while it is strictly greater in duopoly, if no subsidization takes place.

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