Platform Differentiation in Two-Sided Markets

In this paper we investigate a two-sided market platform model. In the standard framework, firms interact with consumers through one or more platform providers. For example, video game providers (firms) develop games for a gaming console (platform), and end users (consumers) play these games on the console. Consumer utility may depend on the number of other consumers who interact on one side of the platform and the number of firms that interact on the other side of the platform. We develop a general monopoly platform model and derive general and closed form solutions which are consistent with the previous literature. We also characterize consumer’s demand for the platform and show how it relates to the simple one-sided monopoly case. This model is extended to include same side network effects and we derive similar results. We then extend the model to include competition between two homogeneous platforms. We determine the Nash Equilibrium for two competing platforms and show how these relate to several current two-sided markets such as those for video game consoles and smartphones. Lastly, we compare welfare between a monopoly platform and two competing platforms and show their are cases where a monopoly platform is welfare improving.