May 2020

The Economics of Platforms in a Walrasian Framework

Anil K. Jain and Robert M. Townsend


We present a tractable model of platform competition in a general equilibrium setting. We endogenize the size, number, and type of each platform, while allowing for different user types in utility and impact on platform costs. The economy is Pareto efficient because platforms internalize the network effects of adding more or different types of users by offering type-specific contracts that state both the number and composition of platform users. Using the Walrasian equilibrium concept, the sum of type-specific fees paid cover platform costs. Given the Pareto effciency of our environment, we argue against the presumption that platforms with externalities need be regulated.

Keywords: Two-sided markets, first and second welfare theorems, externalities


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Last Update: May 18, 2020