Platform Economics: Recent Findings and Further Questions

How is platform competition different from regular competition? The first part of this article reviews recent findings from theoretical platform economics. It describes two novel ways in which more competition among platforms has been found to be potentially harmful. It then discusses results on two potential antidotes: multi-homing and interoperability. The second part of the article raises two issues facing the governance of platform industries and argues that they deserve further attention. The first is a distinction between standard network effects and “spillovers,” and the second is on the challenges of regulating firms that are, by their nature, outliers.

By Alexander White^[1]

I. INTRODUCTION

In textbook economics, a standard lesson is that monopoly is inefficient and adding competitors improves the situation by lowering prices and providing consumers with more choices. In industries with network effects, which are a key feature of platform intermediaries, it has long been recognized that it is not so obvious whether competition has such a positive effect. After all, unlike the fictional world of “perfect competition,” in which the presence of many suppliers leads to zero markups and maximization of total surplus, when network effects are present, there are obvious benefits to market concentration. For example, when hailing a ride using your smartphone, you would probably prefer having all potential drivers in your area appear on a single app (e.g.