• 19 Sep 2007
  • Working Paper

Strategic Interactions in Two-Sided Market Oligopolies

by Emmanuel Farhi & Andrei Hagiu

Executive Summary — Strategic interactions and the logic of competitive advantage in 2-sided markets are fundamentally different than in traditional, 1-sided markets. For instance, an investment that decreases a firm's costs may increase the profits of its competitors and decrease the profits of the firm undertaking the investment. Such surprising effects arise because of the possibility that 2-sided platforms may end up subsidizing the participation of 1 side. There are also important implications for antitrust scholars: tying and other practices that may appear as harming competition in 1-sided markets can in fact benefit competitors in 2-sided markets. Key concepts include:

  • If competing 2-sided platforms subsidize 1 side of the market, then a decrease in 1 of the 2 firms' costs may relax competition by making it less necessary for its competitor to subsidize.
  • So, increasing competitive advantage through cost advantage for 1 platform may end up benefiting both platforms. In a 1-sided market, however, cost reductions by 1 firm always hurt rivals.
  • Tying in a 2-sided market may cause no competitive harm to rivals.

Author Abstract

Strategic interactions between two-sided platforms depend not only on whether their decision variables are strategic complements or substitutes as for one-sided firms, but also—and crucially so—on whether or not the platforms subsidize one side of the market in equilibrium. For example, with prices being strategic complements across platforms, we show that a cost-reducing investment by one firm may have a positive effect on its rival's profits and a negative effect on its own profits when one side is subsidized in equilibrium. By contrast, if platforms make positive margins on both sides, the same investment has the regular, expected effects. Our analysis implies that the strategy space and the logic of competitive advantage are fundamentally different in two-sided markets relative to one-sided markets.

Paper Information