Competitive bottlenecks and platform spillovers

Organised by

• Department of Economics

The classic competitive bottleneck result of Armstrong (2006) provides a useful way to understand how despite apparent competition between platforms to attract buyers who only join one of the platforms, they may not compete at all for sellers on the other side who potentially want to reach buyers on all platforms. We show how this classic competitive bottleneck theory extends to allow for more general marketplace settings which take into account the pass-through of platform fees through seller pricing, as well as applying for a wide range of platform's design choices. This allows us to show how such platforms may tend to set excessive commission fee levels, excessive first-party entry, insufficient platform investment, excessive limitations on disintermediation by sellers, and excessively stringent app tracking policies. We then provide a taxonomy of what can drive the platforms' choices to deviate from the competitive bottleneck benchmark in terms of two fundamental types of spillovers across platforms in response to a change in their design choices: a utility spillover and a platform-revenue spillover, showing how several features of mobile device platforms suggest they exhibit negative utility and platform-revenue spillovers, and that as a result their design choices may be even further distorted away from welfare maximising levels.

Co-author: Tat-How Teh (Nanyang Technological University of Singapore)