Farsighted Stability in Service Platform Competition
Abstract
Problem definition: In the platform economy, platforms often engage in both demand and supply competition. We consider two platforms competing through service prices and wages. Instead of exploring myopic stability, i.e., Nash equilibrium, which focuses on the immediate payoff change from a one-step deviation, the two competing platforms are farsighted and can anticipate their rivals’ reactions. They consider the chains of reactions following their initial deviation as well as the long-term consequences of their actions. Methodology/results: We model the competing platforms by a queueing system where customers and workers strategically decide whether to join and which platform to join. We first determine the equilibrium of the worker-customer subgame and then analyze the platforms’ service pricing decisions. To derive farsighted stability, we apply the concept of the von Neumann-Morgenstern farsightedly stable set (vNM FSS), which requires both internal and external stabilities. To find the vNM FSS, we first prove that any vNM FSS for the service platform competition is a singleton, and then show that a strategy profile being Pareto efficient is a sufficient and necessary condition to form a singleton vNM FSS. In this way, we identify all the vNM FSSs by determining the Pareto-efficient strategy profiles. Managerial insights: We show that while myopically stable outcomes leave both platforms zero profit, platforms can coexist in the market and earn positive profits at the farsightedly stable outcomes. Farsightedness enhances the profitability of the platforms by fully extracting surplus from both the demand and supply sides. However, it cannot achieve the efficiency of a merged system where two platforms are operated by a single entity. We further show that the advantage of farsightedness over myopia is independent of the platform’s structure (whether one-sided or two-sided), whereas the efficiency of farsightedness does depend on the platform’s structure.