Vertical Relationships within Platform Marketplaces

Mark Tremblay

doi:10.3390/g7030017

Abstract

In two-sided markets a platform allows consumers and sellers to interact by creating sub-markets within the platform marketplace. For example, Amazon has sub-markets for all of the different product categories available on its site, and smartphones have sub-markets for different types of applications (gaming apps, weather apps, map apps, ridesharing apps, etc.). The network benefits between consumers and sellers depend on the mode of competition within the sub-markets: more competition between sellers lowers product prices, increases the surplus consumers receive from a sub-market, and makes platform membership more desirable for consumers. However, more competition also lowers profits for a seller which makes platform membership less desirable for a seller and reduces seller entry and the number of sub-markets available on the platform marketplace. This dynamic between seller competition within a sub-market and agents’ network benefits leads to platform pricing strategies, participation decisions by consumers and sellers, and welfare results that depend on the mode of competition. Thus, the sub-market structure is important when investigating platform marketplaces.

Highlights

Over the last 10 years, smartphones have become ubiquitous
The popularity of products is realized after sunk participation decisions are made
The mode of competition that exists within sub-markets affects the network effects between consumers and sellers, which in turn affect agents’ participation decisions and platform pricing strategies

Summary

Introduction

Over the last 10 years, smartphones have become ubiquitous. In 2013, the smartphone market reached 1 billion units sold to consumers worldwide. In addition to being an important consumer good in its own right, the smartphone provides consumers with the opportunity to purchase applications (apps) that can be used on the smartphone. I show how competition among sellers affects the platform’s pricing strategies, the resulting levels of content and consumer participation on the platform, and the welfare that is generated on the platform. If the gains to consumer surplus from an increase in competition within a sub-market are sufficiently large this argument fails and welfare improves These findings show the importance of the sub-market structure when investigating pricing and welfare on a two-sided platform. [8] develop a model with heterogeneous consumers and find equilibria that correspond to many platform markets, including smartphones and video game consoles They do not consider the pricing relationship that exists between consumers and sellers.. This paper allows for heterogeneity and aims to illustrate the importance of the sub-market structure that exists within a platform in analyzing network effects, platform pricing strategies, and platform participation.

The Model

Consumers and Sellers

The Platform and Timing of Play

Equilibrium

Content Provided by the Platform

Conclusions