Vertically Disintegrated Platforms

Abstract

Understanding the implications of digital platform strategies on user welfare has become a crucial issue for policy makers and economists alike. In payments, distributed ledger technologies such as the blockchain have introduced new models of platform governance in the form of vertically disintegrated platforms (VDP). In this paper, we develop a framework to study the implications of vertical disintegration on user welfare. A VDP mediates between users and processors that enable interactions between users. The VDP controls the price structure but the price level is set in a competitive equilibrium between processors; proceeds from operating the platform service are split between processors and the VDP. We find that the welfare ordering between traditional (integrated) and disintegrated platforms crucially depends on the platform cost structure and the regulatory conditions in the market for processors. When the cost of integrating processors depends on the transaction volume, the VDP can produce higher welfare. In contrast, when this cost is fixed, an unregulated VDP is less desirable than the integrated platform. However, regulatory limits on the VDP power over processors can make user welfare under a VDP dominate. Within our framework, we analyze recent applications in the payment industry, including central bank digital currencies, and show how different design choices affect user welfare.