Proprietary vs. Open Two-Sided Platforms and Social Efficiency

43 Pages Posted: 18 Apr 2007

See all articles by Andrei Hagiu

Andrei Hagiu

Boston University - Questrom School of Business

Date Written: May 2006

Abstract

This paper identifies a fundamental economic welfare trade off between two-sided open platforms and two-sided proprietary (closed) platforms connecting consumers and producers. Proprietary platforms create two-sided dead weight losses through monopoly pricing but at the same time, precisely because they set prices in order to maximize profits, they partially internalize two-sided positive indirect network effects and direct competitive effects on the producer side. We show that this can sometimes make proprietary platforms more socially desirable than open platforms, which runs against the common intuition that open platforms are more effcient. By the same token, inter-platform competition may also turn out to be socially undesirable because it may prevent platforms from suffciently internalizing indirect externalities and direct intra-platform competitive effects.

Keywords: Two-Sided Markets, Platforms, Indirect Network Effects, Product Variety, Social Efficiency

JEL Classification: H00

Suggested Citation

Hagiu, Andrei, Proprietary vs. Open Two-Sided Platforms and Social Efficiency (May 2006). AEI-Brookings Joint Center Working Paper No. 06-12, Harvard Business School Strategy Unit Working Paper No. 09-113, Available at SSRN: https://ssrn.com/abstract=980755 or http://dx.doi.org/10.2139/ssrn.980755

Andrei Hagiu (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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