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Platform Competition

Paper Session

Friday, Jan. 6, 2023 12:30 PM - 2:15 PM (CST)

New Orleans Marriott, Galerie 1
Hosted By: Industrial Organization Society
  • Chair: Ginger Zhe Jin, University of Maryland

Entry Into Two-Sided Markets Shaped By Platform-Guided Search

Kwok Hao Lee
,
Princeton University
Leon Andreas Musolff
,
Microsoft Research

Abstract

We evaluate the problem of firms that operate platforms matching buyers and sellers, while also selling goods on these same platforms. By being able to guide consumer search through algorithmic recommendations, these firms can influence market outcomes, a finding that has worried regulators. To analyze this phenomenon, we combine rich novel data about sales and recommendations on Amazon Marketplace with a structural model of intermediation power. In contrast to prior literature, we explicitly model seller entry. This feature enables us to assess the most plausible theory of harm from self-preferencing, i.e. that it is a barrier to entry. We find that recommendations are highly price elastic but favor Amazon. A substantial fraction of customers only consider recommended offers, and recommendations hence noticeably raise the price elasticity of demand. By preferring Amazon’s offer, the recommendation algorithm raises consumer welfare by approximately $4.5 billion (since consumers also prefer these offers). However, consumers are made worse off if self-preferencing makes the company raise prices by more than 7.8%. By contrast, we find no evidence of consumer harm from self-preferencing through the entry channel. Nevertheless, entry matters. The algorithm raises consumer welfare in the short and medium run by increasing the purchase rate and intensifying price competition. However, these gains are mostly offset by reduced entry in the long run.

Pricing and Efficiency in a Decentralized Ride-Hailing Platform

Renata Gaineddenova
,
Yale University

Abstract

Asymmetric information about market participants’ valuations and costs plays a crucial role in the efficiency of a platform’s design. Using novel data from a ride-hailing platform called inDriver, I examine whether decentralizing the pricing mechanism improves market efficiency. Unlike its competitors, inDriver requires riders to offer a price for their requested trips, and allows drivers to either agree to the offer, ask for a higher price, or ignore the request. Under this mechanism, a rider with a high willingness to pay for a trip can offer a higher price to increase her chances of being matched. At the same time, under decentralized pricing riders might not truthfully reveal their valuations, which can result in lower average prices on the platform. To understand welfare implications of decentralized pricing for riders and drivers, I develop an equilibrium model of a decentralized ride-hailing market and estimate its parameters using user-level data on the universe of ride requests in a single city. I then use the obtained estimates to compare welfare under a decentralized mechanism to an alternative mechanism in which prices are chosen by the platform. I find that decentralized pricing significantly improves efficiency in the studied market.

The Effects of Platform-Owner Entry on the Competitive Behavior of Third Party Firms

Benjamin T. Leyden
,
Cornell University

Abstract

I study how third-party firms respond to a digital platform owner’s decision to compete in its own marketplace. Using seven years of data from the Apple App Store and the Google Play Store marketplaces, I investigate how the monetization, product quality, and entry/exit behavior of third-party firms on Apple’s platform change after Apple enters its marketplace by either directly releasing its own application, or by integrating competing functionality into its mobile operating system. I characterize the product space using text descriptions of each product. This allows me to measure the proximity of third-party products to the first-party entrants, and thus account for developers’ level of exposure to first-party entry. I find mixed evidence regarding the monetization response of developers, and more consistent evidence of improvements in the quality of third-party products. However, responses vary across markets, indicating that a more nuanced approach to regulating platform-owner entry may be warranted relative to a blanket, platform- or industry-wide policy.

Platform Search Design and Market Power

H. Tai Lam
,
University of California-Los Angeles

Abstract

On the Amazon.com marketplace, both Amazon and small businesses compete in offering retail products. However, Amazon chooses what products consumers see when they search. Products sold by Amazon may have a better position compared to small business products, but the effects on consumers and sellers are unclear. Policymakers have expressed antitrust concerns, suspecting “self-preferencing” and “gatekeeper” market power. To study this, I develop a model where heterogeneous consumers search for differentiated products arranged on an acyclic graph (i.e., tree). Firms price in response to consumer search and how their products are arranged—highlighting how search design determines market structure. The model endogenizes consideration set formation and recovers the correlated distribution of consumer preferences and search costs. Estimated on Amazon data, I show that not accounting for product arrangement (e.g., search results and BuyBox) leads to incorrect price elasticity estimates. I provide three results on market power and antitrust policies using counterfactual product arrangements. (i) To isolate the effect of Amazon’s position advantage, I remove it through a “neutral” product arrangement. Profits shift from Amazon to small businesses, confirming Amazon’s sizable market power. However, consumer welfare falls when consumers reduce their search intensity in response to reduced value from searching. This suggests Amazon’s incentives and consumers’ preferences are aligned, weakening the claim of self-preferencing. (ii) Banning the platform owner from also being a seller reduces consumer welfare through price rather than product variety. (iii) I propose an alternate policy, splitting the platform into an Amazon side and a small-business side. Giving consumers the ability to search for and “support small businesses” would alleviate the market power imbalance without harming consumers.

Discussant(s)
Matthijs Wildenbeest
,
University of Indiana
Tobias Salz
,
Massachusetts Institute of Technology
Ginger Zhe Jin
,
University of Maryland
Devesh Raval
,
Federal Trade Commission
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • L0 - General