Platform Competition and Interoperability: The Net Fee Model

Is more competition the key to mitigating dominance by large tech platforms? Could regulation of such markets be a better alternative? We study the effects of competition and interoperability regulation in platform markets. To do so, we propose an approach of competition in net fees, which is well-suited to situations in which users pay additional charges, after joining, for on-platform interactions. Compared with existing approaches, the net fee model expands the tractable scope to allow variable total demand, platform asymmetry, and merger analysis. Regarding competition, we find that adding more platforms to the market may lead to the emergence of a dominant firm. In contrast, we find that interoperability can play a key role in reducing market dominance and lowering prices. Broadly speaking, our results favor policy interventions that assure the formidability of the competition that dominant platforms face.

This paper was accepted by Joshua Gans, business strategy.

Funding: L. Wu thanks the NET Institute (www.netinst.org) for financial support.