Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts
Posted: 13 Sep 2007
We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that competitive bottlenecks arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.
Keywords: Two-sided markets, network externalities, exclusive contracts, competitive bottlenecks
JEL Classification: D43, D62, L13
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