The Impact of Within Platform Competition in Two-Sided Business Models

Abstract

We analyze theoretically and empirically the impact of exogenous changes in competition in one side of a two-sided market on the optimal pricing of both sides. We consider both its positive impact through enhanced indirect network externalities and its negative impact on same side agents because of higher competitive pressures. We find that unambiguously within platform competition causes an increase in the price charged to the other side of the market while its impact on same side is ambiguous. We test our hypothesis in the context of the U.S. airport industry exploiting an exogenous change in competition driven by a regulatory change. Consistent with our hypotheses, we estimate that an increase of within airport airline competition increases commercial revenues per passenger. This increase only takes place in airports that adopt a platform business model. We also investigate the impact of passengers through with both sides of the airport are connected.