The Effects of Competition and Entry in Multi-sided Markets

We study price competition and entry of platforms in multi-sided markets. Utilizing the simplicity of the equilibrium pricing formula in our setting with heterogeneity of customers' membership benefits, we demonstrate that in the presence of externalities, the standard effects of competition can be reversed: as platform competition increases, prices, and platform profits can go up and consumer surplus can go down. We identify economic forces that jointly determine the social inefficiency of the free-entry equilibrium and provide conditions under which free entry is socially excessive as well as an example in which free entry is socially insufficient.

Automated summary

The study shows that in multi-sided markets, the effects of competition can be reversed, and increased platform competition may lead to higher prices and profits for platforms but lower consumer surplus. This indicates that free entry equilibrium can result in social inefficiency and may be either excessive or insufficient depending on certain economic conditions.