The Dynamics of Single- and Multi-Sided Platform Monopolies

Abstract

In this paper we develop a general model of one-sided and two-sided platform businesses and apply it to a monopolist framework. We have a particular interest in how the social loss and other metrics depend on the strength of the network (direct or indirect) effect. We study how network effects impact monopoly power, how the deadweight loss decomposes between market power and the unpriced network externality, and how cross-subsidies relate to the strength of the network effects. We find that the stronger the network effect, the larger the optimal size of the platform and the greater the deadweight loss, while the smaller is the monopolist’s profit margin. In the two-sided setting, we explore the social benefits of allowing positive profit on one side to subsidize price on the other side below cost. We find that under some of the more extreme parameterizations we consider, a regulated platform required to break-even on both sides of the platform (rather than just in total) could be socially less desirable than the unregulated monopolist. This result obtains infrequently across the parameterizations we study, but it is a possibility.