Farsighted Stability in Service Platform Competition

Problem definition: In the platform economy, platforms often engage in both demand and supply competition. We consider two platforms competing through service prices and wages. Instead of exploring myopic stability, that is, Nash equilibrium, which focuses on the immediate payoff change from a one-step deviation, the two competing platforms are farsighted and can anticipate their rivals’ reactions. They consider the chains of reactions following their initial deviation as well as the long-term consequences of their actions. Methodology/results: We model the competing platforms by a queueing system where customers and workers strategically decide whether to join and which platform to join. We first determine the equilibrium of the worker-customer subgame and then analyze the platforms’ service pricing decisions. To derive farsighted stability, we apply the concept of the von Neumann–Morgenstern farsightedly stable set (vNM FSS), which requires both internal and external stabilities. To find the vNM FSS, we first prove that any vNM FSS for the service platform competition is a singleton and then show that a strategy profile being Pareto efficient is a sufficient and necessary condition to form a singleton vNM FSS. In this way, we identify all the vNM FSSs by determining the Pareto-efficient strategy profiles. Managerial implications: We show that whereas myopically stable outcomes leave both platforms zero profit, platforms can coexist in the market and earn positive profits at the farsightedly stable outcomes. Farsightedness enhances the profitability of the platforms by fully extracting surplus from both the demand and supply sides. However, it cannot achieve the efficiency of a merged system where two platforms are operated by a single entity. We further show that the advantage of farsightedness over myopia is independent of the platform’s structure (whether one-sided or two-sided), whereas the efficiency of farsightedness does depend on the platform’s structure.

Funding: H. Chen is funded by the National Natural Science Foundation of China [Grants 72671131, 72394363/72394360, 72201124] and the Youth Project of the Humanities and Social Science Foundation of the Ministry of Education of China [Grant 22YJC630006]. P. Guo acknowledges the financial support from the Research Grants Council of Hong Kong [Grant CityU 11507124]. Q. Li is funded by the National Natural Science Foundation of China [Grants 72371068 and 71871052] and Donghua University 2026 Discipline & Research Enhancement Project. Y. Wang acknowledges the support from the National Natural Science Foundation of China [Grant 72542003] and the Department of Logistics and Maritime Studies at The Hong Kong Polytechnic University [Grant P0064051].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0730.