Platform Competition In Two-Sided Markets With Switching Cost

Platform competition theory in two-sided market is a new subject which rises at the area of industrial organization theory in recent years. It mainly focuses on the competitive strategies of platforms that connect two groups of agents with cross-group externalities between them. This research is just starting now. Examples of two-sided markets, such as operating system, mobile value-added service, electronic commerce, are very important in the New Economy. Thus the research of platform competition in two-sided markets has great significance in theoretical and practical meaning. In these two-sided markets, agents often need to incur switching costs when changing from one platform to another. The impact of switching costs on the platform competition hasn't been explored by available literatures yet.The thesis first elaborated the definition, classification and characteristic of two-sided market and switching costs, and then gave a sum up of theoretical literatures of platform competition in two-sided markets and the impact of switching costs on competition. Base on these theories, and combining with hot spot problems of practical economical life of China, the main subjects of this paper is defined. The thesis introduces switching costs to the theoretical model of platform competition in two-sided markets, and analyzes the pricing strategy and compatibility incentive of competitive platforms. Considering the impact of switching costs can give us a better explanation of the platforms'behavior in competition. It can replenish the theory of two-sided markets and give some policy suggestion.The main contents and conclusions are summarized as follows:1. In the second period, switching costs make the price and the profit of platforms grow higher. Because the platform which had larger market share in the first period can price higher than the other, the platforms'market share in the first period became very important in the competition. So in the first period, two platforms would compete seriously for the market share and the price may be lower than the marginal costs.2. A platform's price structure depends on the switching costs of the two-sided agents. Who has higher switching cost have to pay more in the second period, but they could receive more in the first period.3. If the platforms pay customers to switch in the second period, in the equilibrium, each platform's price is independent of its market share in the last period. Paying customers to switch can be viewed as a method to distinguish the agents with higher switching cost from those with lower costs in the same group. One-third of agents changed platforms in the second period, and this is a dead-weight loss from a society's point of view.4. Compatibility can increase the entrant's market share and profit, so its incentive of compatibility is higher than the incumbent. But whether the entrant has higher incentive in contrast with the social optimum level depends on the sensitivity of agents'switching cost to compatibility. The social optimal level of compatibility is lower when the switching cost is more sensitive.5. The entrant can't enter the market when the agents'switching costs are too high. Under the regulation of government, the barrier level of switching cost is higher than that under the pursuit of maximum profit of entrant platform. It means that when the switching cost isn't low enough, in other words, when the extent of compatibility isn't high enough, the entrant has entered the market yet. And this led to a loss of society's welfare.6. When two platforms compete at the same time, the effect of the price increasing led by compatibility is more obvious. But compatibility will reduce the advantage preponderance formed in former period. Only when the market shares of two platforms are nearly equivalent, they all have intention to increase their compatibility.The main innovations include: The thesis considers the impact of switching cost in discussing the price strategy of competitive platform in two-sided market, and gets the relation between the competition in two periods and the determinant of platforms'price structure. It compares the equivalent under PCTS with the conclusion under UNIF. This paper analyzes the compatibility choice of platforms, including the entrant, the incumbent, and the competitive platforms at the same time, on the base of horizontal difference model.