The Economics of Platforms in a Walrasian Framework

Friday, 9 December, 2016
In this working paper Townsend and Jain (2016) present a tractable model of platform competition in a general equilibrium setting, allowing multiple platforms to emerge. We endogenize the size, number and type of each platform, allowing for different utility functions, different endowments for varying types of agents, and different capital costs. Contrary to the prior macro-financial literature on network architecture and the partial equilibrium industrial organization literature on two sided markets, our economy is efficient. Platforms internalize the network effects of adding more and different types of users by offering bundles which state both the number and composition of users. They use a Walrasian equilibrium concept and allow the price of joining a platform to depend not only on the characteristics of the platform, but the identified type of user. The sum of fees paid for a given active platform will cover its costs. With this extended commodity space and bundling, the first and second welfare theorems apply. They argue against distortions created through fees and the presumption that platforms with externalities have to be regulated.