Two-Sided Competition and Differentiation (with an Application to Media)

We model a duopoly in which two-sided platforms compete on both sides of a two-sided market. Platforms (or intermediaries) select the quality they offer consumers, and the prices they charge to consumers and firms. In this model, non-trivial competition on both sides induces non-quasiconcave payoffs in one subgame. All equilibria are characterized. Under well-defined conditions, the unique equilibrium in pure strategies can be computed. Prices entail a discount on one side, a premium on the other one and the quality offered to consumers is distorted downward. When the pure-strategy equilibrium fails to exist, a mixed-strategy equilibrium is shown to always exist and the distributions are characterized. In this case, the market may be preempted ex post. The model may find applications in the media, internet trading platforms, the software industry or even the health care industry (HMO/PPO).