Abstract
The externalities that operating system users receive from software developers are among the leading features of those ‘platform’ industries but are rarely incorporated into applied models of imperfect competition. We argue this omission arises from the di culty of collapsing the dynamic pricing characterizing such industries into a static policy analysis model. Given the role these pricing strategies play in coordinating consumer behavior, a theory ignoring them quickly becomes intractable and indeterminate. Postulating that platforms identify and then robustly implement best response allocations, we show platforms play an Insulated Equilibrium that eliminates the need for consumers to coordinate their behavior. This facilitates the analysis of an oligopoly model without unrealistic restrictions imposed for tractability. We use this to illustrate the additional distortion, analogous to that identified by Spence’s (1975) study of a quality-choosing monopolist, arising when platforms determine both their prices and their (externality-driven) level of quality.
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