Platform Entry in Two‐Sided Markets Under Asymmetric Beliefs

ABSTRACT This paper focuses on the competition between an incumbent and an entrant in two‐sided markets where users hold responsive beliefs about the incumbent and hold passive and pessimistic beliefs about the entrant. Under such asymmetric beliefs, platform strategy, barriers to entry and welfare are studied. In the equilibrium analysis, I show that the commitment of the incumbent satisfies the quantity version of “seesaw principle,” that is, a factor that is conducive to a high number on one side tends to call for a low number on the other side, while the entrant normally takes the opposite tack. I also show that given the total external benefits on the two sides, it is more difficult for the entrant to enter the markets when the structure of external benefits on the two sides is highly skewed. Moreover, compared with the case of two‐sided singlehoming, market entry under competitive bottlenecks may be more difficult. In the welfare analysis, I show that the existence of the entrant can increase social welfare and consumer surplus, even if it does not enter the market. However, the multihoming behavior of users on one side under competitive bottlenecks does not always increase social welfare and consumer surplus compared with the case of two‐sided singlehoming.