Working Paper | HBS Working Paper Series | 2009

Strategic Interactions in Two-Sided Market Oligopolies

by Emmanuel Farhi and Andrei Hagiu

Abstract

Strategic interactions between two-sided platforms depend not only on whether their decision variables are strategic complements or substitutes as for one-sided firms, but also -and crucially so- on whether or not the platforms subsidize one side of the market in equilibrium. For example, with prices being strategic complements across platforms, we show that a cost-reducing investment by one firm may have a positive effect on its rival's profits and a negative effect on its own profits when one side is subsidized in equilibrium. By contrast, if platforms make positive margins on both sides, the same investment has the regular, expected effects. Our analysis implies that the strategy space and the logic of competitive advantage are fundamentally different in two-sided markets relative to one-sided markets.

Keywords: Two-Sided Markets; two-sided platforms; strategic complements; strategic substitutes; competitive advantage; Cost; Investment; Profit; One-Sided Platforms; Two-Sided Platforms; Duopoly and Oligopoly; Competitive Advantage;

Citation:

Farhi, Emmanuel, and Andrei Hagiu. "Strategic Interactions in Two-Sided Market Oligopolies." Harvard Business School Working Paper, No. 08-011, August 2007. (Revised February 2009.)