Platform competition = multihoming
On two-sided platforms, competition is shaped by the possibility of multihoming, where platform users and producers join multiple competing platforms.
When your platform experience multihoming, other equal or overlapping platform alternatives offer and sell the same product, service, or value to your customers, your customers are not loyal to your platform but alternate between platforms when it suits them.
If initially, both sides single-home, each platform provides exclusive access to its users on the other side. If one side multihome, platforms compete on the multihoming side and exert monopoly power on the singlehoming side.
Platform interdepenence when pricing
There is an interdependence between the two sides served by the same platform. For example, lowering the price on one side can make the platform more competitive on the other side without lowering its price there. The policy implies that a platform may maximize its total profits by subsidizing one side under certain conditions, such as when experiencing asymmetric network effects or different demand elasticities.
Cross-subsidization is also a competitive strategy in platform markets. There must be interdependence between "sides" on a two-sided platform to choose cross-subsidization. Competitive advantage depends on assuming that at least one side of the platform single-homes, and the effect is reduced or even disappeared when both sides multi-home. Although multihoming on both sides was uncommon in early platforms, with often proprietary operating systems, game consoles, and optical disc players. Today, entry and exit barriers on platforms are lower, making joining multiple platforms easier, and participants on both sides of two-sided platforms frequently multi-home. Today either side of the platform can be joined by simply downloading an app, such as ride-sharing or food delivery.
Today we often see platforms with multihoming on both sides. Then the interdependence result and cross-subsidization policy implications must be qualified or changed. For instance, it is reasonable to assume that in online retailing, there is little incremental value in having a potential buyer see a seller's product listing on eBay once that buyer has already seen that duplicate listing on Amazon marketplace. So, in this case, we see that equilibria exist with multihoming on both sides with no interdependence between the two sides of the same platform.
Divide-and-conquer strategy?
Optimal pricing for a platform on one side depends on the prices of the other platform only, and thus it is never optimal to subsidize the other side. However, the interdependence between the two sides served by the same platform will often maximize its total profits by subsidizing one side, typically the one with more elastic demand.
Thus the standard strategic advice to subsidize one side to maximize total profits may be limited or even incorrect when both multi sides home, which can be significant given the increasing prevalence of multihoming.
Loyalty incentives reenforce the interdependence
The degree of interdependence also depends on the size of the benefit from using the platform a second time. If the partial benefit is minimal, the interdependence is also insignificant, and the pricing of the other platform is a much more critical factor in determining a platform's optimal price. If, on the other hand, coming back to the platform the second time again conveys a significant additional benefit, the interdependence between the two sides of the same platform reappears, and the conventional pricing strategy advice applies again.
In conclusion, we need to be wary of overstating the importance of interdependence even when it does exist. We risk missing the crucial drivers of the market equilibrium and choosing the wrong pricing strategy to compete.
Read more on Platform governance when multi-homing:
