When does a platform’s entry into its own marketplace benefit consumers rather than harm them?
Senior Consultant Salvatore Piccolo co-authored a paper alongside Shiva Shekhar, Jorge Padilla, and Marco Pagnozzi about the conditions under which a platform’s entry into its own marketplace balances seller competition against reduced double marginalization.
In this paper, the authors identify market maturity as the key determinant of platform encroachment’s welfare effects. They demonstrate that while encroachment is more likely to harm consumers in young marketplaces where seller entry remains critical, it can actually increase consumer surplus and total welfare in mature markets, as the entry margin weakens and reduced double marginalization takes precedence. Consequently, both the competitive and welfare consequences of encroachment depend critically on the stage of marketplace development.
Abstract
In a platform market where user participation is endogenous and shaped by direct network effects, we compare the competitive and welfare effects of two alternative business models: pure intermediation and ‘encroachment’ — a hybrid model where the platform competes with third-party sellers by selling its own private-label products. There are two groups of sellers: entrants, who must pay a specialization cost to access the marketplace, and incumbents, who have already paid it. With encroachment, the platform has no incentive to entirely foreclose their downstream rivals if there are positive network effects. Surprisingly, although encroachment restricts entry, it increases consumer surplus, total welfare, and the incumbents’ profit when there is a sufficiently large number of incumbents in the marketplace.
Read the full article here.
The views and opinions expressed in this response are those of the authors and do not necessarily reflect the views of Econic Partners or its clients.
